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Value Investing with Legends
Eddie Perkin - Battling Biases and Building Better Investment Teams
00:56:25
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- [00:00]
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Our descendants would look back on the first half of the 21st century and say, I wish I were alive during that time.
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Welcome to a new edition of the Value Investing with Legends podcast. My name is Michael Mogison and I'm an adjunct professor at Columbia Business School and a faculty member at the Heilbron center for Graham and Dad Investing. My co host, Tano Santos, the Robert Heilbron professor of Asset Management and Finance at Columbia Business School and the faculty Director at the Heibren center, couldn't join us today, but will be back soon. In many ways, the investment industry has never been better. Lots of bright people, tons of data, extraordinary computing power, expert networks, and most recently, powerful tools from artificial intelligence. But the scarce resource may not be people or information, but rather judgment under uncertainty, the ability to make good decisions with incomplete information under pressure, and with real capital at risk. Our guest today has spent more than two decades leading global equity teams and thinking deeply about why smart people and well intentioned teams fall prey to the same mistakes. His recent work is not only about biases, but also about building teams and processes that challenge assumptions, welcome dissent, and learn from mistakes. We are delighted to welcome Eddie Perkin. Eddie was Chief Investment Officer at Eden Vance and Goldman Sachs Asset management and has 25 years of global asset management experience. Until early 2023, he was chief Investment Officer of the Equity business at Eaton Vance, now part of Morgan Stanley Investment Management, where he led a team of 70 investment professionals with $75 billion in assets under management. Prior to Eaton Vance, Eddie served as Chief Investment Officer for the International and Emerging Markets Equity Division at Goldman Sachs Asset Management in London. He was also a Portfolio manager for numerous strategies. Before moving to London in 2008, he was a portfolio manager and analyst on GSAM's US Value Equity team in New York. His book, Running against the Herd, Battling Biases to Make Better Investment Decisions, published in August 2026 by Columbia Business School Publishing, offers lessons from behavioral economics as well as managing investment organizations. Eddie earned his BA in Economics from the University of California, Santa Barbara and his MBA proudly from Columbia Business School. Today he serves as an Independent Director on the Invesco Mutual Fund Board and as Executive in Residence at Babson College where he mentor students through the Babson College Fund. Welcome Eddie. Thank you very much for joining us today. Lots of topics we're keen to talk about.
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Thank you Michael. It's great to be here.
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Let's start off with your path. Tell us a little bit about your background growing up and what first drew you to investing.
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Well I'll start at the very beginning. I was born in Johannesburg, South Africa to British parents. They were expats in South Africa at the time. And as an infant I moved back with them to the uk. I grew up in Sheffield, which is in the north of England, until the age of seven. Both my parents were entrepreneurial. And so in the late 70s, the British economy was not in great shape. Everything was very stagnant, inflation was high. And so they thought they needed to make their mark in the US and they immigrated. Since it was the late 70s, the place to go was Houston, Texas. It was an oil boom. That was the city they chose. And we settled for a couple years in Houston, Texas. And there were two things that happened at that time that I think were formative. One is I can recall sitting in the back of the family station wagon, my father in the driver's seat, and peppering him with questions about his business, but also about inflation and interest rates, which were strange topics for a child who was eight or nine years old. The other thing that happened at that time is I opened my first bank account. I opened a passbook savings account at bank of America with my life savings, which were a grand total of $50. And I got a quarterly statement in the mail. I was earning about 4% interest annualized on that account. And so the first statement had earnings or interest of about 50 cents. Now, 50 cents even to a kid wasn't a lot of money. But the concept that my money had earned money was very powerful and really resonated with me. And I also recognized the fact that that incremental $0.50 would now also be earning money on my behalf. So the concept of compound interest resonated very early. After a couple years in Texas, we moved to San Diego, settled down there, and as you mentioned, I went to UC Santa Barbara for economics. I was part of the investment club there. But after graduating I didn't really have a sense of what I wanted to do with my career. And I kind of languished for a couple of years. I knew I was interested in investing, but I didn't really understand how the asset management industry worked. I thought Wall street was all mostly sales oriented roles and I wasn't interested in that. But I read an article in the business section in the newspaper one day that profiled Warren Buffett and Berkshire Hathaway. And there was a half page chart showing the stock price of Berkshire Hathaway. And that was a very compelling visual, the amount of wealth that had been created over his tenure at Berkshire. I said Boy, this looks interesting and I want to do this. And so I started looking into it and almost overnight I became highly motivated and very focused and read everything I could about Buffett. That, of course, led to Ben Graham and eventually all paths lead back to Columbia Business School. So I decided I needed to go to Columbia Business School. When I got my acceptance letter from the admissions department at Columbia, that was a life changing moment for me. It meant I was going to be uprooting myself from California and my family and friends and moving to the East Coast. But it made, you know, it put me in an environment where I was surrounded by really know, smart, intelligent investors. And just the access you have in New York City and at Columbia specifically to great investment thinkers is very powerful and it started my career in asset management.
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Before we get to your investment philosophy, you know, your book addresses the question of why smart people, capable people, keep making the same mistakes. Was there an early investment experience, either something that you did, your own mistake, or something that you observed that sort of got you thinking about all that behavioral stuff, the behavioral biases and so forth?
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I've always been interested in the topic. I don't know when it started specifically. I think it was a journey. Not one single event. There are a couple of things that come to mind though, when you ask. That one goes back to when I was 13, got my first pack of baseball cards and I was starting to follow baseball at the time. I was interested in the San Diego Padres, who'd been in the World Series the year before but didn't know many of the players around the league. A friend, neighbor who was also interested in baseball cards offered to make trades with me. And I had in that first pack of baseball cards, I had a Don Mattingly second year card. I'd never heard of Don Mattingly. I didn't follow the Yankees. He offered me several players for that one card and I agreed to the trade. I did make one smart decision. I requested that as part of the trade I'd be allowed to see his Beckett price gu. And so after the trade, the first thing I looked up was how much is this card, this Don Mattingly card that I've just traded away? How much is that worth? And the answer was several dollars. And all the cards I'd received were essentially worthless. And so a very early, not too expensive lesson in asymmetric information and price discovery. But that probably and other experiences helped make me skeptical, which I think is an important element of investing. The other experience from the late 90s before I went to Columbia, but When I was very interested in investing comes from an investment club that I started. It was family and friends. This is in the late 90s. I'm pitching value investing to everybody and they all want to own tech stocks. The way we did things was the amount of investment you had in the fund determined how many votes you had for new stocks that were being considered. And I had a big investment in the fund. So effectively I was the dictator of this fun. And so I insisted that we only own value stocks. And eventually I had a mutiny on my hands. And the groupthink and the social pressure of not being invested in the part of the market that at that time was doing very well was very strong. And this is true even though it was friends and family. So I got an early lesson in groupthink, but also the importance of not being dogmatic with your approach.
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Yeah, tough period for a lot of value investors and obviously all vindicated a couple years later. But it was tough at the time. Let's delve into investment philosophy. How would you describe the core of your investment philosophy today and what do you look for in an attractive investment opportunity?
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The metaphor I like to use is I want to buy a Mercedes Benz with a scratch on the side. Why a Mercedes Benz? Well, it's a good car. It's got a good engine, it's comfortable, it drives well, it's reliable, it lasts for years. It's a good car. Why the scratch? Well, the scratch is what gives you a discount and get you a good price. And so the metaphor bringing that back to investment markets would be, I'm a quality value investor, not a deep value investor, not a cigar butt investor, to use Ben Graham's term, a quality value investor. Quality to me means a company that can earn high and sustainable returns on invested capital and can deploy incremental capital at those high returns. It also means I don't think all value investors necessarily put a priority on this, but balance sheet strength to me is super important. And the reason is if you're valuing the enterprise and there's a range of potential values when you do valuation work and as the equity holder, you're the residual. So the more debt you have in front of you, the wider the range of potential values to the equity. So I think if you have too much debt involved, you lose some of that margin of safety. I want to buy good businesses and I don't want to overpay them for them. I want to buy things at a discount to intrinsic value.
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So you spent time as a PM and analyst on GSAM's US Value Equity team in New York. And then you became CEO for the international and emerging markets equity business in London. What's different about managing US equities versus international emerging markets in terms of things like information quality or governance or accounting liquidity? All a bunch of things you just talked about. And are there different flavors or types of inefficiencies that you perceive that you could exploit? In other words, do the Mercedes and scratches look different in international markets versus
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the us Initially I moved over to run the European equity strategy. So that was my first taste of that. And I think I had certain preconceptions that were disabused upon arrival. One was that the currency effect would be important. I think generally, certainly for large cap European stocks, they're multinational currency doesn't matter that much. The accounting is very similar. I think one thing that European companies do better is dividend policy. So they have the concept of interim dividends and then a final true up dividend based on earnings. I think the US companies get themselves in a bind because the expectation from investors, certainly dividend income oriented investors, is that thou shalt never cut the dividend no matter what's going on with the operating business. So I think Europe actually does a better job on that front. Language I thought might be an issue, but in Europe I would say the only time we needed a translator for management meetings was with Russian or Japanese executives. I think just about everyone else, certainly in Europe, the management teams all speak English as the language of business. So I think in most cases Europe's like the us. Another difference would be you have in certain companies the governance structure. You have family ownership or you have foundations, sometimes they have the voting rights. As a US investor used to US corporate governance, I initially didn't like that. But I came to appreciate it because I think some of these firms have run for very long term value and they're able to make better capital allocation decisions over time. When you move to emerging markets, I think it's super important to have a presence on the ground. I think information flow, local knowledge, those sorts of insights are pretty powerful in some of those out of the way places. And I think you're disadvantage both from an information and trading perspective if you don't have feet on the ground in some of those economies. So I think that's important.
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A lot of value investors start with screens on valuation, so basically cheap stocks. And in your chapter on short termism you describe looking for sort of these great long term compounders. But you suggest that for the world's best businesses. Valuation actually should come later in the process rather than the beginning of the process. So how do you balance that search for sort of the great businesses with the value investors objective to have margin of safety?
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I think valuation is important. I think with screening. I'm a sort of lukewarm advocate for screens. They obviously serve a purpose of narrowing down the opportunity set and helping you focus your time. But the risk with the screen is that you screen out something good. And it may not look good on the surface, but as you start digging in, it looks more interesting. And I think for me, valuation, and I think a source of alpha can be the approach to valuation. So if you use overly structured a PE ratio threshold, a PE is a great example because there are companies that maybe they're cyclical businesses and they're currently in a downturn, maybe they're investing in some new growth initiative and that's depressing earnings. So earnings don't always tell the full picture. And I think an overly simple approach to valuation sometimes works against you. So. But your main question is, how do you go about valuing some of these better companies? I think everyone wants to own a company with high returns on invested capital and lots of growth. So you're competing with a lot of people when you pursue those companies. There has to be the scratch in the Mercedes example. There has to be something that is temporarily wrong or misunderstood in some way. I love when I hear people say a stock has overhang. Oh, there's an overhang, or there's headline risk with that one, because that means there's near term controversy. But if it's fundamentally good business underneath, then you can own it for the long term. And the temporary controversy or the macro factor that's depressing valuation, those are the opportunities to get involved with a company that might otherwise be expensive in a different environment.
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Michael Steinhardt's got this idea about a variant perception and you talk about why that's important in stock pitches and you've alluded to this again, the scratch on the car. But do you find that there are categories of variant perception that are out there, things that you're maybe sniffing around just to see and patterns that, that show up in terms of the kinds of things that end up being so called headline risk.
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Variant perception. Perception is the outcome of a process. It's the conclusion you reach at the end. You mentioned at the beginning, I'm involved with the Babson College fund as an executive in residence. It's an advanced investing class at Babson with the undergraduate and graduate Students, and as part of the class, they have to pitch stocks to each other. They're each required to pitch two stocks per semester. And the students in that class who have the most success, in my observation, are the ones who treat it like a job. They have a coverage list, coverage universe. They are looking at all these different companies, they're following the industry, they're learning about it. And eventually a thesis or variant perception emerges. The ones who approach it more like a traditional class, I think, sometimes struggle. They treat a stock pitch like a term paper. I've got a certain date deadline that I've got to do this by, and so a month out, I'll start working on it. I'll run a simple screen, I'll identify a couple stocks and I'll do work on them. I'll pick one of them and then I'll come up with my thesis. And the thesis, I think, needs to be at the beginning of the process, not at the end. The thesis emerges from the work. It's not something you slap on to a presentation at the end. So I think it's the same with variant perception. It emerges from doing work. And I think you can do what I would call put yourself in a variant vantage point. We talked about valuation already. I'll use an example from 2007. I was at GSAM on the value team, and I was covering real estate investment trusts. I was new to REITs as a coverage area, and there were a lot of old timers, people who've been doing REITs forever, some of them who've come from the private real estate world. And they were all using the same valuation method, which is to look at private market valuations, infer a cap rate from those buildings and transactions, and then apply those cap rates to the public REITs. And it occurred to me, like valuing them based on income, that makes sense. You've got a reference point of the private market, but what if the private market's overvalued? Then you're just. It's circular. And what I was really interested in was coming up with a framework that looked at it on an asset value basis. So I came up with a methodology for calculating replacement costs. The land and the physical structure aren't sitting on top of that land, which is ultimately constrained on the income and the cap rates that others were using. So that gave me different insights and I think kept me out of trouble when the financial crisis unfolded the following year.
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This is sort of related to that. In Running against the Herd, you argue that success depends less on predicting the future than on building processes that welcome dissent, challenge assumptions and learn from mistakes. So what parts of the investment process made the biggest difference when you move from managing money personally to actually leading large teams of investors?
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I think a lot of people, when they move from a player to a coach role, struggle with that transition. None of us, in my opinion, none of us are natural born leaders. We have to learn that skill. And I think a lot of the times I remember at Goldman, we'd often have these town halls with senior partners. I remember Gary Cohn gave one of these one time. They all had the same story, which was I was really good at my job, whatever it was, trading bonds or whatever it was, and then I was so good at it, they promoted me and I was in charge of other traders. And I tried to do both for a while. I tried to continue to run my own book and supervise others and lead others, and I ended up doing both poorly. So I think it's important, and I've not always followed this advice myself, but I think it's important to fully commit to the leadership role when you have that opportunity. And I also think it's important to recognize that there are lots of different ways of generating alpha in this business. And just because you have a way that's successful for you mean you need to go in and prescribe that to everybody else. And so I think having a little humility, respecting the process, respecting the people and their approach, but there are certain foundational principles that I think have to be present in order to have success. And the three words I kept coming back to over the years whenever I moved into a new leadership role were focus, accountability and empowerment. The investment team has to have focus. Especially when you're part of a larger organization, there are so many distractions. You've got HR meetings, you've got the sell side calling you up and trying to get you to meet with a company you might not be interested in, and so on. So just keeping those distractions at bay, I think is a major part of the role for the cio. And then accountability. I think one of the great things about our business is you can have accountability because you can measure precisely to the basis point how someone is performing. The only other business that I think is like that is certain sports roles, athletes. If you're major league baseball, hitter or pitcher for that matter, your batting average, your ERA is in the newspaper every day. And so that level of precise measurement allows you to have accountability. But if you're going to have that accountability, if you're going to hold people accountable to their performance, then they have to be empowered. So I was always a big believer that the analysts on the team should have quite a bit of discretion and be empowered within their area of expertise. So I never liked to refer to an analyst making a recommendation to me. They were always part of the decision making unit and would help us make investment decisions rather than pitch ideas or recommend ideas.
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So today I want to shift gears a little bit to talk about biases which you cover in your book, which is fabulous, by the way, and I recommend everybody read it. So when it comes out, you walk through 15 biases in the book, including endowment effect and sunk costs and confirmation bias and overconfidence. Are there particular biases you think cause the most damage inside investment organizations? And if so, like, what would be your top two or three things to try to really avoid?
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I mean, some of the ones you mentioned, I think for sure the first chapter in the book is the endowment effect, because I think that's the one that hits investors the hardest. But I think there's a combination of specific biases that I think have an underlying root cause. So I think of sunk cost, I think of overconfidence and a couple others. Confirmation bias that really impact analysts. And I think the root cause is our industry's obsession with having conviction. You must have conviction. Your portfolio managers complain, my analysts never have enough conviction in their ideas. And if you think about what the word conviction means, it's a feeling. I feel good about this stock. So the reason I mentioned those biases is you think about what an analyst does. The sunk cost of the effort that goes into developing an investment idea. They're reluctant to let go of that. The confirmation bias is you should be seeking out, disconfirming information, trying to prove yourself wrong. You're going out there and trying to prove yourself right. And all of those are because you're expected to have strong opinions at all times and you're never allowed to change your mind. You look like you're waffling if you change your mind. So I really dislike. I use it sometimes myself, but I'm on a mission to purge the word conviction from our industry lexicon.
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You have this awesome chapter on short termism and you introduce what you call the Robinson Crusoe exercise. Could you walk our listeners through that exercise and explain how it changed the way your team thought about things like moats and reinvestment, runways and returns on capital and time horizon, all that good stuff. So Robinson Crusoe.
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Robinson Crusoe. Whenever we talked to clients about this, they loved it. Robinson Crusoe, of course, is a book by Daniel Defoe. In the book, he's stranded on a desert island for 28 years and two months. In 2008, when I moved over to London for the first time and started working with a new team focused on the European equity market, the the new colleagues had a strong valuation bias in their process. And so with the market falling apart, the financial crisis unfolding, the stocks that kept popping up on valuation screens were banks, heavily leveraged mining companies, heavily leveraged industrial companies. And that was not the part of the market you wanted to be involved with at that time. And I felt like valuation was leading us to the wrong stocks by starting with value. Not that valuation wasn't important, but by making that the first constraint, we were identifying enough high quality companies. So we ran a portfolio exercise. We called it the Robinson Crusoe exercise. We said, look, we won't use 28 years, we'll use a five to seven year horizon. Imagine that you're going to be stranded on a desert island. You've got no Bloomberg terminal, no phone. You cannot trade out of this stock, you have to own it for five to seven years. And when you're rescued from that island, you need to be confident that that company has grown, has compounded value and is in a stronger position on the day you're rescued, from the day you were marooned. And it was a way of generating some of these long term compounders and really thinking about the very special companies that have sustainable competitive advantage.
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I love that. And by the way, I had the opportunity to interview a guy who I think is your classmate, which is Todd Combs, who at the time was at Berkshire Hathaway. And Todd described going over to Warren Buffett's house on many Saturday mornings and they would sort of sit and talk about. Precisely. They didn't call it Robinson Crusoe, but the same idea like when we look out which businesses will be better, economics intact, generating cash five years from now. So really trying to keep the eyes trained on the future. The Outcome Bias chapter has an awesome story of your analysis of the decisions about two point conversions in the National Football League and how it led to a meeting with the general manager of an NFL team. Well, I guess before you get fully into the story, you may have to explain what a two point conversion is, just to make sure everybody's on the same page. But can you tell that story and explain how it relates to outcome bias and tie back to the investment industry?
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Absolutely. So I'll start by defining outcome bias. Outcome bias is when you judge the quality of a decision by the outcome rather than the process that went into it. Outcome bias is prevalent in investing, of course, but also in sports. The term Monday morning quarterback speaks to judging after the fact based on how something turned out. So in 1994, the NFL brought the two point conversion into the league. So after you score a touchdown, you can kick for a one point conversion, which is a very high probability of achieving that, or you can attempt to get the ball in over the goal line either running or passing, and that's worth two points, but has a lower probability. So there's a, there's a decision to be made. All these head coaches in the NFL in 1995, they were faced with this new decision that they weren't used to making. And so they all went to the same chart which had been developed by dick Vermeil at UCLA in the early 70s for the college game. So it got a lot of it right, but there were a few errors on there. A year later, in 1995, I was watching the San Diego Chargers, my favorite football team, play the Philadelphia Eagles, and the Chargers were down by two touchdowns. They scored a touchdown, so they were down 14 to 6 with the decision to be made. And the coach went for a one point conversion. And throughout the game and then after the game it kind of noodled at me and I just said that didn't. I don't think that's right. I think they should have gone for two there. And I did the math and eventually I called the NFL office in New York and asked for statistics on two point conversion success rates and so on and built out a full improved model from what the NFL were using. And I pitched it to every team in the NFL. We're now in 1998 and I got a meeting with the general manager of the Tennessee Oilers. They just moved from Houston, so they were still called the Oilers, and his name was Floyd Reese. We spent three hours talking about the stuff and he was very interested in the topic. He said, one problem is if we're going to do this, we're going to have to find a way to protect the ip because everyone in the NFL knows each other and your chart will just get passed around very quickly. In the end, nothing really came of it. And even today in the sports analytics community, what I just described is very well understood. When you're down by two touchdowns and you score, you go for two. In the book, I lay it out in a flowchart with all the math. But it's amazing that there are still many head coaches in the NFL who do not do that. And I think it's because of outcome bias. It's because if it doesn't work out, they get judged. They get the sports talk radio, the fans, Twitter, everyone says, what a boneheaded move. Why did they do that? Even though it was the right decision, judging based on the outcome rather than the quality of the decision on the front end. And you see that in markets as well. You buy a stock, it doesn't work out and everyone thinks you're an idiot. I think having, having a process that helps you avoid that is important.
- [28:13]
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I'll mention, Eddie, you talked about being at the Sloan MIT Sloan Analytics Conference, Forge Analytics Conference in 2020, in March of 2020. And we both, I think, went to the same session. I think it was Dick Thaler and then it was followed up by a couple other folks, including Bill James. And I think Thaler's basic argument was it's a bizarre thing that we know certain things analytically, yet the teams don't do it. So the question is, why are the teams not doing it? And as you point out, a big chunk part of it is just that it's, you know, people do whatever, whatever they did before, but a big chunk of it is exactly what you said is outcome bias. If you do what's traditional, no one's going to ask questions after the fact. Even if it doesn't work, if you do something that's non traditional, even if you know and if it fails, you're going to get, you're going to get, you know, brutalized in the press the next day. And most people both, and it's not just the coaches could also be owners, they don't want to be put in the spotlight. You mentioned a moment ago that, you know, once an analyst has a thesis, he or she should spend sort of their waking moments trying to prove it wrong rather than trying to prove it right. So are there practical methods that investors can use to confront this confirmation bias? In other words, are there tools like whether it's Devil's advocate or pre mortems or using AI even to try to build into your process methods to sort of combat or confront confirmation bias?
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Yeah, you think about what the scientific method says, develop a hypothesis and then test it. And you test it to try and you see if it works initially, but then you've got to try and prove it wrong. And that's the whole concept of peer review and others trying to replicate the results and so on. But for some reason in the investment business, we're always trying to prove ourselves right. I can remember analysts saying, I just met with the management company and everything I heard confirmed my thesis. And I said, are you really saying that to me? I want to hear a little more skepticism. So I think it does come down. It's very hard and unnatural for human beings to try to prove themselves wrong, to seek out disconfirming information. So I think you need an ally, that ally. And Annie Duke talks about this all the time. She talks about the idea of a quitting coach. So somebody who can help you quit in the case of that decision, but help you see the light and be close enough to see and understand the issue, but also distant enough that they're not emotionally involved themselves. So I think having an investment team where the other members of the team have the job of playing devil's advocate to your ideas is a great way to do it. And as you mentioned, AI, I think a lot of people using AI for information gathering or other reasons, I think AI can be a great devil's advocate. You have to be careful because AI is drawing its information from humans and they all have biases, so they're pulling in some of those biases. But I wrote about this on LinkedIn on one of my posts that I think you can prompt AI to be your biggest critic. I did it with Nike. I own Nike in my personal portfolio. And about six or nine months ago I was doing work on the stock And I asked ChatGPT, I said, Give me your best five reasons why I should not own this thing and let me have doesn't care if it hurts my feelings. And so I came up with a bunch of ideas. Some of them I was able to dismiss and others I said I hadn't really thought about. And you can take it or leave it. You're not outsourcing the decision to AI. It's a tool, it's a source of information and insight, and then you make your decision based on that. So I think all of these things, but the basic premise of a devil's advocate, someone who's a little bit detached, who can help poke holes in your idea and help you avoid the confirmation bias.
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B
So successful investing requires buying and selling. You've talked about the endowment effects on cost fallacy, mental accounting. These things all do tend to show up in sell decisions. And analysis also showed that you were you as a PM were particularly good at selling. So why do investors struggle with a sell decision? And are there specific ways that investors can get better at selling versus just buying.
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We had Cabot Research, which is now part of FactSet, look at one of our portfolios. They looked at every trade we made for a three year period. When they presented the results to me, they said, eddie, we see something different here from what we normally see. Normally with most portfolio managers, they had a method for separating alpha and return into three sources. There was the buy decision, the sizing decision and the sell decision. They said most investors, most portfolio managers are pretty good at buying. They they know they can identify stocks to own and those decisions tend to be alpha generative. It's hit or miss on sizing. Some are good, some are not so good, but that's what we normally see. And then the sell decision is where we see a lot of performance drag for you for your portfolio, Eddie. We see positive alpha coming from the buy decision. There's a little bit of a drag from the sizing decision, but you're really getting a lot of your alpha from the sell decision. And that resonated with me because I think a lot of the process and the portfolio exercises that we ran within the team and the other elements of the process I think were supportive of that. When you think about a sell decision, there's different reasons why you might get a sell decision wrong. One is you stick with a winner too long. Another is you fail to cut bait on something that doesn't work early enough in the process or there's an event like a bad earnings miss and stock's down, you react emotionally. So there's all kinds of reasons to get the sell decision wrong. I think one thing I believe is we put so much effort into the process around the buy decision. You've got to do a stock write up, you've got to have a model, you've got to met with a company, whatever it is. There's an enormous amount of documentation and so forth that goes into the buy decision. But the sell decision, the analyst walks into the PM's office. Stocks hit my price target or they just reported earnings and they missed. I want to get out. And it's like there's almost no hurdle to the exit. So I think creating a little bit of friction to the exit is a good idea. So what could that be? Well, sleep. If a stock's down a lot and you're in danger of reacting emotionally, sleep on it. Wait a day before you place your trade, write a post mortem. Just the effort of, oh, I know I'm going to have to write a post mortem if I sell this I think can be a little bit of friction to make you think through the decision before you make it. So adding not a lot, but a little bit of friction on the way out I think is one idea.
- [34:49]
B
So you've been active in markets for more than a quarter century. I'd love to talk about some of the trends that are happening. And the first is the shift from active to indexed. So as more money's moving into index or rules based funds, do you perceive that as any effect on market efficiency? Does indexing make markets less efficient, more efficient? Does it not make a difference whatsoever? So does that come into your thinking at all as you think about markets in both price discovery and liquidity?
- [35:17]
A
I'm skeptical that the trend towards more indexing, more passive, has led to market inefficiency. I think a lot of people, when they say that they're talking their own book or it's motivated reasoning, they want to believe it. I mean, we all want to believe it. It'd be great if the market were that inefficient. But there's been a lot of academic work in this area. The original paper, I think was in 1980 by Grossman and Stiglitz. And my understanding of what that paper said is a paradox. Markets can only be efficient if there are inefficiencies to be exploited and make it effic, attract investors who are willing to commit time and resources to do that. So the kind of equilibrium point, as I understand it, is a little bit of market inefficiency. I had one of my favorite classes when I was at Columbia was taught by Joel Stern of Stern Stewart, the firm that came up with economic value added Eva. And he was an interesting character. He's a University of Chicago guy and believed in efficient markets. And he had this concept of lead steers that he would talk about. So in a herd of bulls all stampeding, how do you predict what direction they're going to go in? Well, you could ask each one of the bulls what it intends to do, but in the end it's just a handful of lead steers that are determining the direction of the whole herd. So index funds free ride off of the behavior or decisions that active managers are making. And in my opinion, and I think this is borne out in this work that people have done, it doesn't require that many or that much capital to be pursuing inefficiencies in order for the market to be approximately efficient.
- [36:52]
B
The other big trend is kind of a move. Well, for the part that is active, it seems to be moving to more short term strategy. So even we see this in the quantitative community, more high frequency trading for quants. But even inactive, there's been a huge rise in these so called multi strategy funds that are lots of pods that are trading quite frequently. So that's sort of the short termism and then the other one's the rise of retail. Retail is sort of of written off a bit and it's come storming back in the last five or six years, 20% of trading volume. Do you think those two things in terms of short termism from the active part that's still out there and retail, does that have any influence on creating opportunities?
- [37:31]
A
One of the things we would do is to try and get out of being guilty of short termism ourselves is this exercise we call the time traveling reporter. So we'd ask everyone on the team, imagine you're a financial journalist and you're going to write the headline of the Wall Street Journal or the Financial Times one year from today. Take a time machine to the future, write the headline. And at first that sounds like you're just projecting from, it's just another form of making a forecast. But it's not because you're taking yourself out of the current moment, out of the noise and you're looking back on the present from the perspective of the future and you can decide what what matters here and what doesn't. What headlines that are obsessing everyone today are going to be gone a year from now. I think that can be a source of alpha, just taking yourself out of all the noise and the high frequency trading and data that everyone's always looking at. And then retail, I haven't really studied it, but it certainly seems like with some of the meme stocks and that sort of thing that things disconnect from intrinsic value.
- [38:37]
B
I want to talk a little bit about leading investment teams. It's something we probably don't talk enough about. And I want to start that discussion with April 12, 2008. So you're sitting on your couch watching the Masters golf tournament and your boss calls from London to say that the CIO of the European equity business has resigned and she wants you to get on a plane the next day and to replace them. You say yes. And when you arrive, you say the existing investment team sort of had three different kinds of receptions. You know, one group was hey, we'll take kind of a wait and see attitude. The second says, hey, we love this guy, we'll were on board. And the third group was a little bit resistant to change. So what did that experience teach you about inheriting a team in a crisis and even how to manage different types of personalities?
- [39:22]
A
Ideally, you move very quickly and decisively in that situation. The team were good at their jobs, the portfolios were performing well. The problem was there were clicks within the team, tension. There'd been turnover on the team and so morale was low. Things were kind of unsettled. The fact that I got the job, management's flying the guy in from New York to tell us how to pick European stocks. A couple people had been passed over for the role when it came up. And so there was a little bit of several members of the team took kind of a wait and see approach. The problem I had was I wanted to move quickly, but the clients were very sensitive to turnover. So in the asset management industry, clients don't like to see turnover, understandably. And so part of the mandate was don' don't rock the boat. Don't make any changes. And that made it difficult to manage people who were disgruntled. But I think in the end, the backdrop of the financial crisis, especially when Lehman Brothers went down, it was sort of all bets are off. Everyone's worried about whether they have a job at all. And so that allowed me to make some of the changes I needed to make. And one of those was we had three people covering financial stocks. The financial sector was collapsing in terms of its representation in the index. So we were able to use the backdrop of the market environment to redeploy one of those individuals into another sector and make a personnel change in one case. And so I'm probably one of the few people who remember the financial crisis with a little bit of fondness just because it sort of gave me the backdrop and the excuse to make the changes that I knew needed to be made.
- [41:05]
B
Now, in contrast to taking over a team, I also want to talk about building a team. And in your book, you have this, I think, fair warning about distinguishing between good cultural fit, which can ultimately be euphemism for he or she is just like us. So when you're building a team, how do you distinguish between shared values, which is something we do want, from sameness, which is something we probably don't want, and how do you hire specifically for curiosity and independence of thought, which. Which are interesting but not always easy things to sort out.
- [41:37]
A
I remember seeing that phrase good cultural fit at Eden Vance when we would interview someone and I'd look at the notes from the interviewers and I thought, well, yeah, I guess it's good culture is Always super important for an investment team. It was especially important at Eden Vance. But I wondered what the interviewer meant with that comment. And yeah, you want a diversity of opinions and insights and expertise. Where you want a common culture is around things like a shared goal of generating alpha and then the process that goes into that, including constructive conflict. I'm a big advocate for constructive conflict and debate. Another thing I'll say on this topic is a lot of the times the HR people do the first round of interviews and they aren't always looking for the same things that we would be looking for. So they're often impressed with someone who's gone to an Ivy League college and worked in private equity or invested investment banking. And sometimes the non traditional career paths and the unique backgrounds, people from the military, people who played sports, people who worked in industry. Those can be very good investors. And so we were always looking for unusual people for our teams. And yeah, you're right. How do you evaluate someone in a 30 minute interview for curiosity and independence of thought? I think you look at what they've done. Do they have any unusual hobbies when you ask them questions, do they give you conventional answers or do they have a different way of looking at the world? And that can be helpful. The final thing I'll say on the topic of interviewing is I think it's really important after the interview, assuming you have several interviewers, that they not quickly gather and compare notes, I think you want to independently send your feedback maybe to the HR person or the hiring manager so that you get independent thoughts rather than you the pressure to come to a consensus on a candidate.
- [43:33]
B
And I might even add on that Eddie, that sometimes you can even give numerical scores on various dimensions that you find important. And like you said, do it independently and then send them off. And then someone can tabulate that because once you get in the room with everybody else automatically people tend to converge. I want to pick up on this theme. You've mentioned it a couple times. I'm using the phrase a big theme of your book is collaborative conflict, right? So teams need enough trust to disagree, but they also need enough discipline to actually come to decisions. When you think about what does a great investment meeting look like to you when it's really clicking and getting done, what it's supposed to do.
- [44:09]
A
It's a meeting where everyone's prepared, you've got materials in advance, everyone's read them, and you have a tight 30 minute discussion on a stock and it's no holes barred, you're not personally insulting one another but you're poking holes in their model, you're challenging their thesis, going after it. Not because you're trying to make the person look bad, but because you're trying to get to the bottom of whether it's a good idea or not for clients. You're going to be investing millions of dollars on behalf of other people's money in this idea, so it better pass scrutiny. We used to make sure the materials got sent out ahead of time. We had a standard pack of materials. The other thing I'll mention is you've got to limit the number of people in the room. For some reason, investment meetings to other people in the organization sound really cool, and they want to be a part of it. So salespeople want to drop in, interns want to be part of it, analysts from other teams, client portfolio managers, institutional portfolio managers. If you're not careful, you'll have 20 people around the table. And if a lot of them are not direct members of the investment team, you move from having one of these vetting sessions to a show that you're putting on for the audience, and that's not a good outcome.
- [45:21]
B
It's often in these meetings, though. I mean, people have different personalities, right? So they're extroverts and introverts, and people might have lots of thoughts in their mind, but they're not sharing them to the group. So as a leader of one of those meetings, how do you ensure that people are actually expressing their views? Do you literally call on them? Like you said, preparation is really important. But are there ways to manage the actual meeting to make sure that you're surfacing alternative points of view?
- [45:45]
A
One thing we did was we asked everyone two days before the meeting to submit two or more questions. Those would go to one of our administrative assistants, they'd be collated and. And they'd be kept anonymous. So you were able to ask your toughest question without putting your name to it, if you didn't want to. So that's part of it. It's also good for the presenter because they know the tough questions that are coming in advance and you're not trying to trip anyone up and then in the room. Yeah, I think you do call on people if you have to. And another thing we would do is at the end of the meeting, we would take a vote. And in the early days, we did it with a show of hands, and there were very few. A few people said they weren't. Weren't supportive of the idea when you did it that way. But then we went to A blind vote. And we found that more dissent emerged when people had the COVID of anonymity.
- [46:35]
B
One of the ongoing debates in the investment community is specialists versus generalists. So specialists is deeper knowledge, but typically there may not be interesting opportunities in area of specialty. Generalists of course moving around, but by definition are going to have less specific knowledge. Where do you come down on the specialist versus generalist argument?
- [46:56]
A
I think both can work, but I favor the specialist particularly for the approach that I took, which was you've got to get to a deep enough level of understanding that when there's a mispricing or inefficiency or that variant vantage point that we talked about earlier, that only comes with deep knowledge.
- [47:12]
B
But if I'm a financial services analyst during the financial crisis, as you point out, they may be cheap but they may be perilous places to invest and they fail the Robinson Crusoe. If they fail the Robins. What do you do with those folks? They just don't have anything in the portfolio and they feel a little bit. Yeah, how's that work?
- [47:29]
A
On my teams, people typically had two areas of coverage. So you wouldn't be on just a single sector. I also think if you keep us out of stocks that are going down, that deserves reward. Being underweight, if you're managing versus an index, which is the nature of what I did, then the underweights count as much as the overweights. That's helpful and valuable. And then we would rotate coverage from time to time. So it wasn't like you were a career analyst doing the same sector for 20 years. You could have the opportunity to cover new sectors and new areas over time.
- [47:59]
B
So economists love to talk about incentives. You mentioned at the outset the three words, focus, accountability and empower. How do you set up incentives to make sure that you're fostering those three concepts and reinforcing them and. And making sure they're part of everybody's day to day behavior, I guess.
- [48:19]
A
Reward or punishment? The punishment would be demotion or the worst case you lose your job. The rewards would be of course, monetary rewards and non monetary rewards. So the non monetary rewards I think sometimes are underappreciated. They could be promotions, they could be additional responsibility, they could be public recognition of some sort of. So those are important to remember. The financial incentives in the asset management industry, typically you get a bonus at the end of the year, that bonus. There's different ways of determining what that bonus should be for any one individual. At one extreme, you might tie it to the revenues of the team I'm not a fan of that. I think it incentivizes the wrong things, in my opinion. I always want to tie it back to the client experience. So I want to tie it back to performance as much as possible. I think it's really important and not every firm in our industry does this, but to really very precisely measure the attribution of the analyst, sometimes it gets muddled because of the portfolio manager fingerprints around the trade as well. So having a separate paper portfolio or analyst portfolio that tracks the recommendations of the analyst is important in my opinion. And then I think there needs to be an element, some portion of it that is subjective, that is not totally quantifiable and that's for what I call playing nice in the sandbox. So doing these other things we've talked about, helping to vet ideas, mentor junior people, all the cultural behaviors you're looking for and you can only do that with a subjective discretionary element to the bonus decision.
- [49:57]
B
You graduated from Columbia Business School now close to a quarter century ago. Is there advice you'd offer to students today coming out of Columbia Business School who seek to go in the investment management industry? It's a different world today to some degree, in some ways it's the same type of challenges. What advice would you give to someone who really wants to get into this business?
- [50:18]
A
Well, I think maybe this is not where you were going with the question, but I think it's really important early in your career to have a strong foundation in terms of theory and accounting and all the fundamental elements and technical elements of the job and then you can develop the softer skills and feel for the market market later. I think not enough analysts get the foundation right at the beginning and it hurts them throughout their career. So that's one thing I would say. The other is I grew up in a world of open end mutual funds. There's been a multi year trend now of outflows across open end equity funds. Part of that is the active versus passive debate. Part of it is ETFs are more tax efficient than open end mutual funds. Advisor Preference Various reasons There is always going to be a need for people who know how to allocate capital. Maybe the wrapper will be different in the future. But if you're someone who can identify a mispricing help to allocate capital, you're going to have value and you're going to make good money and you're going to have a very successful career. But you need to be open minded about the product structure and the way in which the Client wants to receive your expertise.
- [51:31]
B
I love the point about the foundation and I obviously completely agree with that. So knowing accounting and strategy and finance, how do you think AI plays into all this? In other words, a lot of young people now are leaning a lot on AI, not only to develop ideas or to write, but also almost a substitute for some of the foundational knowledge. If I'm a young person, how much should I be leaning on this? How much should I just be learning on my own in more traditional ways to really establish that foundation before AI,
- [51:58]
A
when things like, you know, you could down, if you were building a model, you could use FactSet to download pre scrubbed data and then work from that downloaded data. And I always told our junior analysts, go to the 10Ks, go to the source, read through the footnotes and manually input the numbers into the spreadsheet. Because you're going to learn something and going, it's slower, it's going to take longer, but you're going to learn something and going through that process. So I would say the same thing for AI. To me, AI, I think AI can be useful for things like searching for certain topics that come up on earnings calls, or collating data and pulling data to you. But I think when you're doing the hard work of analyzing an individual company, it needs to be that manual process, especially early in your career when you're still figuring out what all these numbers mean.
- [52:50]
B
Seti, this has been an awesome conversation. We're now coming to our closing segment and I'm going to ask Tano's question on his behalf first before I ask mine, which is what worries you most about the future of investing and perhaps what excites you the most about the future of investing?
- [53:06]
A
We talked a moment ago about the challenges of open end mutual funds. So I think we covered that. We live in a world right now. Maybe this is a slightly different answer than the question that's being asked, but we live in a world right now where people are seemingly always looking for the negative, whether it's our politics, the risk of AI and so forth. I think we live in incredibly interesting times. I think if we could get in that time machine and go forward 500 years, our descendants would look back on the first half of the 21st century and say, boy, I wish I were alive during that time. Those folks, they had the whole future in front of them. They lived during this time of incredible change. And with change comes opportunity. So whenever the world is changing, you can kind of get down, worry about it, have anxiety, or you can do what we talk about in the book, which is embrace the uncertainty, look for the new opportunities that are coming, and really go after it.
- [54:06]
B
So you characterize yourself as an optimist at heart?
- [54:10]
A
I think so. I haven't always felt that way, but I do now. I was in New York City earlier in the week, and with the NBA Finals going on and the Space SpaceX IPO, there was a lot of positive energy in New York City.
- [54:23]
B
Eddie, last question is, is there anything you're reading or listening to that you find interesting? And is there a book or are there books that you would recommend to our listeners who want to become better decision makers? And by the way, let me again, just plug your book being the first thing that they should probably get their hands on.
- [54:38]
A
I'm currently reading a book called the Courage to Be Disliked. It came out a few years ago. It's about the psychology of Alfred Adler, who I didn't know much about before this book. But the basic premise, as I understand it's kind of right there in the title actually, is stop trying to please other people. Be your own person. You can choose to be happy. There's free will. You don't have to be a victim of your past experiences. You can choose to be happy. And I think particularly for value investors, where you're taking a contrarian stance, not everyone's going to like you all the time, and that's okay. A podcast that I really like is called what Happens Next by a guy named Larry Bernstein. He's the host and he has interesting speakers come on and talk about a variety of topics across economics, military. He just did one similar to the question you asked a few minutes ago, the impact of AI on the legal profession and how law schools need to adjust to the future. And then books that I recommend. I mentioned Joel Stern earlier. His partner Bennett Stewart wrote a book called Quest for Value. I really like that. It's an older book, but it talks about the importance of understanding the underlying economics of a business and not just relying on the accounting as it's presented to you. And so that one, I think is one of those foundational books that everyone should read.
- [55:58]
B
Eddie Perkin, thank you very much for joining the Value Investing with Legends podcast and to all of our viewers and listeners. Thank you for tuning in and we'll see you for our next episode.
- [56:06]
A
Thank you for listening to this episode of the Value Investing with Legends podcast. To subscribe to the show or learn more about the Halbron center for Graham and Dodd Investing at Columbia Business School, please visit graham and dodd.com. thank you.