Saturday, September 3, 2011

Bronte Capital: Risk management and sounding crazy

I have heard people say - even now - that Carson was sloppy and breathless in his allegations. He was not. He was right. Dismissing him as sloppy and breathless is in itself sloppy and breathless. Indeed siding with conventional sounding language, conventional sounding reason lost you a lot of money in the Sino Forest case. It was better to side with Carson - the seeming madman.

This happens again and again and again. If you have very non-conventional views - even if they are well supported - even if they are right - if you spell them out plainly you will be thought of as a madman because your views sound outrageous.

But a hedge fund manager has it easier than the scientist. The scientist would be ostracized for the views. A hedge fund manager just makes lots of money. If you are right and nobody believes you then there is a chance to make mega-spondulick$. Indeed by far the strongest opportunities for making really good returns come from doing something original. I shudder to think how much Carson and his backers made on Sino Forest but I think we could safely measure it in lifetimes of average earnings.

There is however a problem with this: a portfolio manager who sounds mad may indeed be mad. Even if they are not mad the market may be wrong longer than they can be solvent. Which brings me to the schizoid character of a really good money manager or money manager team. It is highly rational but it appears like controlled insanity. You need the slightly crazy idea-driven maniac who is prepared to think outside the box and you need someone to button them down, to make them appear reasonable and to act reasonable.

Sometimes the two people are in the same body (I know a few of these people and some are not pleasant people because they are so strangely strung). In Bronte's case they are in different bodies with my business partner appearing much more socially, intellectually and even politically conservative than me. We are an odd-couple rather than an odd person.

All this leads me to wondering about Warren Buffett - the greatest fund manager of them all. He is an unusual individual with strange personal predilections. But he sounds so rational. And he is amazingly self-controlled. Indeed his ability to sit on billions of dollars excess cash for years and years at a time waiting for the time to pounce is legendary and extraordinarily hard to duplicate. Buffett says that temperament is more important than brains in investing and I think this is what he means. But it is often Buffett against the world. Buffett is thought of as a has-been by many people. It doesn't matter whether he was avoiding tech stocks in 1998, 1999 and 2000. It does not matter whether he was buying Bank of America now. He is - of course - just mad.

The madness is an important part of how Buffett made all that money. But the self control is - I think - more important.

When we meet clients I do all the talking. Some people have even wondered why I am with Simon (my business partner). We fundamentally have nothing in common. But there is a reason... he is the best control mechanism I have ever found. It took me a long time (and some losses) to realize I even needed one - he has the temperament. But if the career of Warren Buffett is a guide (and I think it is) then to make money over very long periods you need an ability to think right outside the box and a lot of self-control. The self-control is what most people think of as the risk management.

I don't know how you judge the yin-and-yang of this - and I don't know how you pick the individuals or the teams that have it. But when you see two guys who present themselves as partners but one is voluble and one is quiet then make your assessments of the quiet one.