‘The right temperament is more important than IQ’

‘[Lloyd George] had that deep original instinct which peers through the surface of words and things – the vision which sees dimly but surely the other side of the brick wall or which follows the hunt two fields before the throng. Against this industry, learning, scholarship, eloquence, social influence, wealth, reputation, an ordered mind, plenty of pluck counted for less than nothing. It was the very gift which the products of Eton and Balliol had always lacked – the one blessing denied them by their fairy godmother, the one without which all other gifts are so frightfully cheapened. He had the ‘seeing eye’’

Churchill

I believe that there are twelve attributes that make a good portfolio manager:

1. ‘The seeing eye’

Fund management is like chess and the best fund managers can see a couple of moves ahead of their competitors. They need to understand not just the immediate effects of a change but the secondary effects. For example, everyone can work out that a falling dollar against the pound is bad news for UK-based manufacturers exporting to the US. It’s perhaps less obvious that it’s good for UK clothes retailers (much of their product is imported from overseas and priced in dollars) or for a UK TV company (many of the expensive blockbuster films they buy are priced in dollars). A fund manager needs to be a good lateral thinker – thinking tangentially about the world. They need to be prepared to question what others take for granted. They should be able to spot attributes of companies that are out of favour today but may excite investors at some stage in the future. A good fund manager needs vision.

2. Temperament

Having the right temperament is extremely important and I believe it to be more important than IQ. Having a reasonable level of intelligence is obviously essential but being super intelligent without the right temperament is useless. A good fund manager needs to be calm and treat success and failure the same. For example, they mustn’t let a good run of winners go to their head (nor get too depressed when they have a run of several poor investments). I think very emotional people generally make poor fund managers. Good fund managers should be humble (humility is an attribute that many portfolio managers lack) and happy to make mistakes: mistakes are an integral part of the job. It’s an odds game and no one gets it right all the time. A good fund manager can handle mistakes and learn from them. They need to be open-minded and questioning. They also need application and perseverance; it’s a job of remorseless intensity day in, day out, and it can’t be turned off. It’s a never-ending race that you can’t tire of. Unlike many other jobs, it’s not based on projects but rather a continuum, so stamina is important. It is constantly challenging and this intellectual challenge of pitting your wits against other intelligent managers trying to do the same thing and being able to see day-by-day how you are doing is both at times draining but also very stimulating.

3. Organised

A good fund manager is well organised. Because information often comes to them in an unstructured manner, a manager needs to be disciplined in how they go about their job. Because the job has no beginning or end, and because it is never possible to say you know everything about a particular company or industry, there is a need for structure and many inexperienced fund managers flounder because they are unorganised. A good fund manager will plan their day so they drive the agenda, otherwise it’s very easy to let events take over. You need to devote some of the day to events but you mustn’t let them occupy all the day. Also, if you are not careful, you can become mesmerised by your Reuters or Bloomberg screen, and end up spending hours watching them to little avail. Often my non-investment colleagues would ask me what’s going on in the market that day and they were surprised when I said I hadn’t yet looked.

A good part of the job is digesting information, which can be in a written form, electronic or voicemails as well as face-to-face formal and informal meetings. One needs structure to be able to accommodate this. I often had particular times of the day when I did certain activities (e.g. reading written research on the train, or listening to voicemail between face-to-face meetings or in a taxi) and most fund managers devise such a framework to their day. Prioritising one’s time is essential.

4. Hunger for analysis

Fund managers like to know how things work. They don’t want to know just conclusions, but they like to know the process used to get there. They want to know how results have been achieved for example, what is the process that leads from the light switch to the light bulb illuminating and how does the bulb work. I think all fund managers are intellectually curious. A fund manager is always questioning and always thinking. There is no substitute in investment for doing your own thinking and one must allow time for this. The process of growing most of Fidelity’s fund managers internally, through our team of analysts, works well because we find that people who prove themselves as good analysts go on to make good fund managers.

A senior investment colleague of mine has a question he asks all prospective analysts or fund managers looking to join our investment team: ‘How many plastic bags are there in the world?’ He’s not so interested in the answer, but in how the individual goes about trying to answer the question. A good analyst will start thinking about either the demand side: how many shoppers there are in the world, how many times they shop at how many shops, or at the supply side: how they are made, how many factories might there be in the world, what’s the average output per factory etc..

5. A detailed generalist

A good fund manager needs to know a reasonable amount about the wide range of businesses and industries listed on the stock markets that they cover. Their knowledge needs to be both broad and also in reasonable depth in each area. They also need to be able to get up to speed quickly on a new subject so that, in a few hours of study, they become more knowledgeable than the average investor. Although they don’t need to have the detailed knowledge that a specialist analyst would have on their own sector, it helps if they have reasonable knowledge of a comprehensive list of sectors and companies.

When I meet other successful fund managers, their wide knowledge, even about topics unrelated to the stock market, never fails to impress me.

6. Desire to win

Fund management is one of the most competitive jobs and unlike many other activities you see how you are doing day by day, even hour by hour or minute by minute. Jeremy Grantham puts it this way: ‘The investment management business creates no value, but it costs, in round numbers, 1 per cent a year to play the game. In total, we are the market, and given costs, we, collectively, must underperform. It is like a poker game in which the good player must inflict his costs and his profits on to a loser. To win by 2 per cent, you must find a volunteer to lose by 4 per cent, every year . . . Indexing must surely squeeze out active managers until it represents a substantial majority of the business. Remember, it is the worst player who drops out of the poker game to index. The standard of the remaining players, therefore, rises . . . and rises . . . but, fortunately for us, beginners continue to join the game.’

Fund managers need to be motivated to succeed in this intense and competitive environment.

7. Flexible conviction

Every fund manager needs conviction in their views, but they need what I call a flexible conviction or the ability to change their views if the evidence changes. In investment there is often a narrow line between certainty and uncertainty and to be too certain can be a disadvantage – one needs a continually open mind. Some cynicism is good but too much cynicism is a bad thing because the ultra-cynic will find a flaw in everything and never act. I don’t think very cynical people make good investors. A good fund manager must avoid overconfidence or pig-headedness at all costs. If you are never prepared to change your mind you won’t do well. Events happen often that cannot be predicted, and, if these negate one’s investment thesis, one must be prepared to admit being wrong and move on.

8. Happy to go against the crowd

A good investment manager is ‘their own man’; an independent thinker not over-influenced by, and often willing to challenge, conventional wisdom. Most importantly, they are happy to go against the crowd and they are not influenced by what the crowd is doing. Most human beings take comfort from the crowd and therefore contrarians are the exception rather than the rule. I’m often asked if it is something you are born with or whether you can learn to be a contrarian. I think it can be learnt but many contrarians are born that way.

Many of the best investments I’ve made have felt uncomfortable at the time I’ve made them (including my more successful market calls). Often by the time an investment is ‘comfortable’, particularly, in the recovery/turnaround field, it’s too late. A good investor is not worried about what others think despite Keynes’s observation that ‘worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally’.

9. Know yourself

A fund manger needs to know themselves, know their strengths and weaknesses and compensate for them. Also, I believe a good fund manager needs to find a style or method that suits their temperament and then stick to that approach. There are many approaches to making money in the stock market and the portfolio manager needs to be able to establish what works for them personally and then stick to it. I don’t believe a manager can be a jack of all trades, switching between different approaches over time.

Fund management is very much an individual activity. The final decisions are best made by individuals. Democracy does not make a good fund manager.

10. Experience

Beware of what John Train calls the ‘Icarus syndrome’ – ‘nothing is more dangerous than trusting a young enthusiast who has done brilliantly for a while – what I call the Icarus syndrome. With a distressing fatality he plunges to earth in the next bear market . . . I want to see a manager who has been tested by hard times, a veteran campaigner.’ Experience is valuable. As Mark Twain put it, ‘history never repeats itself, but it rhymes’ – the same patterns do reoccur over time and one is not a ‘seasoned’ investor until one has experienced a full economic and stock market cycle. Being able to put today’s events in a historical context is really useful.

Additionally, a good fund manager never stops learning – I didn’t.

11. Integrity

Integrity is essential. Integrity is being honest with investors, companies and colleagues but, just as important, being honest with oneself.

12. Common sense

My final quality is perhaps such an obvious one it’s surprising to be on the list but I do believe it is important and often under-appreciated. When presented with something new or unusual in an investment I always went back to first principles – does this make sense? It’s amazing how often this stopped me doing something that I would later have very much regretted. When it seems too good to be true it probably is. When I came away from a company meeting saying I didn’t understand why there is such a demand for a particular product, or I didn’t understand how this worked, that was a warning – even though no one else appeared to make the same observation. For example, the first time someone explained a CPDO (constant proportion debt obligation) to me, one of the more risky and complex inventions of credit repackaging, I thought the product made no sense. I doubt after recent events we will ever see them issued again.

Many investors look for short cuts when investing as an easy option. There is absolutely no substitute for doing your own thinking.

Good fund managers come from a range of academic backgrounds. I don’t believe that there is one type of qualification that is more appropriate for the job than others and a good fund manager needs both quantitative and qualitative attributes.

Most importantly remember when judging results, it is extremely difficult to differentiate between luck and judgement over short periods of time of, say, less than three-in-a-row years. Skilful investors need time for the probabilities to work in their favour. Every good manager will have an underperforming year – I had three, in 1989, 1990 and 1991!