Kings Unwilling

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“Thus came Aragorn son of Arathorn, Elessar, Isildur’s heir, out of the Paths of the Dead, borne upon a wind from the sea to the kingdom of Gondor.”

The Lord of the Rings, by J.R.R. Tolkien

“Toss me.”

The Two Towers, loosely adapted by Peter Jackson from a text by J.R.R. Tolkien

If you’ve read Epsilon Theory long enough, you’ll know that I am a huge Tolkien fan. I quote it entirely too much, but as long as Ben stays a few Godfather quotes ahead of me, I will willingly fall prey to moral hazard. Being a Tolkien fan means being a Lord of the Rings fan. I adore the books. And like any obsessive fan of a book, I very predictably loathe the movies.

You didn’t come here for a fanboy rant, but let me at least tell you what makes me the most furious about the films: the character Aragorn. Believing his audience to be too stupid to understand a world already in place, with characters, cultures and motives long-established, Peter Jackson undertakes to remake the character Aragorn into a whining, mewling, reluctant heir, who only takes on his kingly airs once he is forced to do so by evil circumstance. It’s a story of growth, you see! Jackson’s commitment to this conceit is so complete, so dumbfoundingly moronic, that he would utterly ruin the climax of the third film by positioning the “Army of the Dead” as deus ex machina, thoroughly invalidating every act of courage during the battle by literally every major character, rather than acknowledge that it was the greatness of Aragorn, his overthrow of the Corsairs of Umbar, leading the soldiers of Lebennin and Lamedon into the fray…I…I’m sorry, this has turned into a fanboy rant, hasn’t it?

The point, however, is that our modern sensibilities really, really dislike the trappings of pride. We find the idea of a king-in-all-his-state distasteful. We only accept the king unwilling.

These sensibilities make their way into our investment thinking as well.

Every once in a while, an investment publication or consultancy has waited the requisite period before posting a rehashed ‘investment manager due diligence tips’ blog post with justified text and columns. You know. A white paper. It will be a list of ten things due diligence professionals or asset allocators ought to do. By some unspoken rule, between 6 and 8 of those must be serviceable and real, if perfunctory sorts of key checklist items. Nothing wrong with that. Seriously.

Likewise, between two and four of the items are intended to be provocative, to get you to think about some other dimension you may not have thought about before. These are usually heuristics – rules of thumb from years of experience – and they usually have to do with the people running the money.

“Invest with someone who drives a Hyundai, not a flashy car.”

“Truly smart people don’t talk about how smart they are.”

“Really educated people don’t talk about their credentials.”

“Beware the PM who is also a good presenter!”

I’ve read and heard every single one of these things. I’ve…probably said a few of them. Sadly, for the most part, they are all nonsense.

Now, I say ‘for the most part’ because there are related concepts with some merit. For one, there is some evidence that PMs who buy sports cars tend to underperform those who buy something more practical, like a minivan. In most treatments, however, this effect appears to be related more to the risk-taking implications of buying a fast car. Likewise, there are good and proper reasons to favor humility. We talk about humility a lot here, because we think it’s one of the most important traits in an investor.

But humility is different from humility! The former is a practiced willingness to test and retest our conclusions, our instincts, our intuition and our priors. The latter is an obsession with the trappings and appearance of being humble. I believe the former is extremely predictive. I believe the latter isn’t worth a bucket of warm spit.

The best-performing manager I ever hired did ALL the things you’re not supposed to do. Wordy 100-page presentations listing every accolade, every qualification and credential of the staff, every research piece they penned. Brags about the traits of their computing clusters. Highly visible poker and chess competitions. Math Olympiads. They annihilated the performance of their peers.

One of my favorite PMs – and yours – is charming, funny and kind. One time a colleague came back to the office in a Ferrari. This PM looked through the brochure, and left to buy one for himself. He has wonderful returns and an enviable business.

In my early days of building a small cap activist portfolio, I was deciding between two funds. On the one hand, the PM team for one was new and hungry. They were also collaborative and humble, pitching the idea of being a valued participant in the board room. I even did a call with the CEO of a portfolio company – a brilliant guy, actually, running a damn good company that makes a healthy portion of the equipment you’ll see making unhealthy food in the average fast food joint. They loved this activist team. My other choice was a slick firm with slick operators in slick suits, run by a blindingly smart guy who was a dead ringer for Aaron Eckhart’s character in Thank You for Smoking. Every time we met with them, the team’s notes were consistent: smart, arrogant, overconfident?

You can probably guess what choice we made. No, the choice I made. It was the wrong one. Not by a little. By a lot. By a TON. What’s more, the main reason why the returns were so different was the friendly manager’s unwillingness to move on from a management team that was giving them a slow maybe, or from stocks for which their operational improvement thesis proved unrealistic. In other words, I lost because I picked the humble! manager who didn’t demonstrate true humility in their decision-making.

There are times as investors and allocators where we do need to listen to our intuition, especially if we are suspicious that there may be something unethical, misleading or fraudulent going on with one of our would-be partners. Likewise, a manager living very large is a manager who needs your management fee. That’s bad. There are very real logistical considerations that go into these decisions.

And yet, if you would insist upon hiring kings unwilling, in my experience you’ll too often end up with a portfolio of managers who have practiced the game of appearing humble!

So what do we do? We design our diligence process and our questioning around identifying traits of true humility.

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Mark Kahn
Member
Mark Kahn

This is insanely smart: “But humility is different from humility! The former is a practiced willingness to test and retest our conclusions, our instincts, our intuition and our priors. The latter is an obsession with the trappings and appearance of being humble. I believe the former is extremely predictive. I believe the latter isn’t worth a bucket of warm spit.”

Yes, it’s spot on to the money management field as Rusty shows, but consciously or subconsciously he also identified one of the biggest (and most obnoxious) narratives distorting and damaging our society, economy, culture, foreign policy and politics today. Bragging and excessive pride are wrong for all the obvious reasons that this agnostic notes The Bible nailed oh so long ago, but today our culture – our elites anyway – have taken a good thing – a hesitancy toward pride and a respect for humility – and made a fetish out of a virtue until they turned it into a vice (I stole that line from 1939’s “Love, Honor and Behave,” a surprisingly sharp philosophical movie wrapped inside a clunky effort that also has a wonderful version of the under-appreciated song “Bei mir bist du schon”).

We should celebrate honest and impressive achievement and use it to inspire all of us to reach our highest potential. Wanting to do your best, succeed, achieve, advance – win! – should be lauded if done honestly, fairly and with respect to others. It makes us and our society better, stronger, healthier, richer (that’s not a crime) and more successful (also not a crime – something rational people saw for ages as one of the noble purposes of life). And we should solute honest humility (perfectly defined by Rusty as humility without the exclamation point).

But this insane piety to humility! – as seen when winners and losers both receive a trophy or the inclination (and top-down nudging) not to judge anything – is corrosive to society as it makes us deny reality – there is success and are successful people and they’ve done something to be acknowledged and appreciated – and undermines the very quality that has advanced mankind. I hope Alexander Fleming wasn’t a pompous *ss, but if he was, so be it – I’m just glad he over achieved and discovered penicillin. If society had to endure one more bore so that every time someone cut him or herself, he or she doesn’t have to fear amputation, that’s a small price to pay.

Real humility is wonderful to see in people who have achieved something; humility! is just another obnoxious meme forced on us by the nudging state and the progressive proclivity to undermine achievement.

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Sandy McIntyre
Member
Sandy McIntyre

I am not sure what humility means. You can be a fierce advocate for your investors without being an overbearing jerk. An IPO roadshow came through our offices years ago. One of our PMs has scrubbed the prospectus and identified some key issues. The company was producing off brand bleach. The issues were Clorox pricing into major retailers and the volatility of resin prices. He kept driving at the issue trying to understand the operating leverage.

The sell side told me that after the meeting the CEO of the company said: “I don’t want that a**hole to get a single share.” We understood the risks and priced the issue. The PM? One of the humblest and nicest individuals you would every want to meet. When investing on behalf of our clients, a pit-bull without ego. In the aftermath of the financial crisis he won a Lipper award as portfolio manager of the decade.

The point? You don’t have to posture; you have to have a process and stay with it regardless of what others may think.

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