A Koan

I’ve been reading Zen stories lately, and even trying my hand at amateur koan introspection. Ben’s latest Epsilon Theory note opens with a story that makes for an interesting koan. Here’s the story:

Back in the day, the long/short hedge fund I co-managed was part of a larger long-only asset manager. Their biggest strategy was US mid-cap value, and it was well staffed with a bevy of really sharp analysts and PMs. But the firm also had a $4 billion US large-cap strategy that was managed by all of two people – the firm’s co-founder as PM, plus a single analyst position that was something of a revolving door … people would come and go all the time in that seat.

The solo analyst’s job, as far as I could tell, was basically to go to investor conferences and to construct massive spreadsheets for calculating discounted cash flow models for, like, Google. And sure, Google would be in the portfolio, because Google MUST be in a large-cap portfolio, but it had nothing to do with the literally hundreds of hours that were embedded in this sixty page spreadsheet. I mean … if the firm’s co-founder/PM spoke with the analyst more than once per week about anything, it was an unusual week, and there’s zero chance that he ever went through this or any other spreadsheet. Zero.

Now to be clear, I think the firm’s co-founder was a brilliant investor. This guy GOT IT … both in terms of the performance of portfolio management and the business of asset management. But here he was, managing a $4 billion portfolio with one ignored analyst, and it was working just fine.

And here’s my koan-version:

A portfolio manager was doing a fine job managing a $4 billion stock portfolio.

A single analyst worked under him, coding up elaborate fundamental models of portfolio companies. The portfolio manager never spoke to the analyst, nor reviewed the models he created.

Over the years, many analysts came and went. It was always the same story with them. But the portfolio continued on in the same way. It was working just fine.

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