A buddy recently had the opportunity to hang out with a retired MLB power hitter. One of those guys that routinely led the league in home runs (…and strike outs). When asked about the secret to hitting a ball so far, the former outfielder responded,
“I don’t know, I just swing really hard.”
I would guess that there was probably a whole lot more to it than just, “swinging really hard.” But – I doubt that the player had ever really dissected his swing enough to properly articulate his process. At some point he probably just chalked it up to ‘muscle memory’.
Interestingly, when you watch interviews with other players, few are able to provide much more clarity with respect to their own process. Most all seem to attribute success to things like: disciplined practice, film study and conditioning.
How likely would it be for the random high caliber athlete to develop into a .400 hitter even if Ted Williams had provided him with a manual on hitting and step-by-step instructions?
What’s intriguing about this is that just like the alternatives industry has allocators identifying and evaluating investment managers, in baseball, there is a person (a scout) who has a similar job – to go out and evaluate talent. Now just imagine how hard it would be for him to distinguish between athletes if he were limited to just those few generic descriptors and a few stats. Numbers provide context, of course, but depending on the extent of experience are of limited value in ascertaining the presence of a long-term repeatable process.
After all, isn’t everyone out there “practicing hard,” “studying film” and “working out?”
Contrast this with Ted Williams. In his book, The Science of Hitting and on the official Ted Williams website, he details his approach to hitting in incredible depth. What made him so remarkable relative to his peers wasn’t just his production as a hitter but in his ability to decompose his process and then articulate it with such clarity.
Of course, baseball players aren’t drafted on the basis of their ability to communicate how they achieve results (and people like Bill James and Billy Beane might argue against it anyway) but for the rest of us who are “hired,” not “drafted,” communication skills are particularly important.
1. Make the decision maker’s job easy by sounding less “industry”
The alternative investments space definitely provides a great case study. While most of the managers we come across tend to realize that “swinging really hard” does not constitute a process, many have convinced themselves that using words like “experience,” “alpha generation” and “uncorrelated return streams,” does.
Although the prevailing wisdom is that the use of industry vernacular is necessary to appear “institutional,” they fail to realize that an overdependence on that language is self-defeating.Defining your edge or process using the same words as your peers makes the allocator’s job of differentiating you from other opportunities exponentially harder, not easier.
2. Stop hiding behind the word “proprietary”
Speaking of overused industry vernacular…it’s certainly likely that your relationships or your highly engineered process are unique relative to your peers – even “proprietary.”
No matter how proprietary, though, it still requires explanation and some level of proof. An investor is never going to allocate, though, if she is not convinced that a strategy is repeatable and based on a sustainable process. Paranoia will only cause more damage than good. That’s what NDA’s are for.
Not suggesting that you need to put the names and phone numbers of your network on your website or provide illustrated instructions in your deck. But if you want someone to give you money, be prepared to explain the source of your success.
If your strategy really is replicable, there is probably not a significant amount of “edge” there to provide a level of sustainability that is worth investing in anyway (even if it is systematic).
Using the baseball analogy – how likely would it be for the random high caliber athlete to develop into a .400 hitter even if Ted Williams had provided him with a manual on hitting and step-by-step instructions? Pretty unlikely.
It’s really not much different for most managers’ proprietary investment strategies.
- Find your own “Happy Zone”
Williams analyzed his batting average in every part of the strike zone. Like a hedge fund providing attribution data on its underlying strategies, this is a way to demonstrate what worked. But more importantly, it provided insights into the conditions that have the highest probability to work going forward.
Managers that can articulate a differentiated process while also providing clarity into the market conditions most conducive to future success are in a significantly better position to substantiate their value proposition than those that cannot.
By clarifying for an allocator what to “root for” and then delivering in a way consistent with that guidance, you have again simplified her job. This is true even in down months when conditions occur that you laid out as being detrimental to your performance.
It is astounding how simple this all sounds but yet how rarely it is done in practice.
Ask yourself…did Ted Williams make his process easy-to-understand because he was an exceptional hitter. Or was he an exceptional hitter because he was able to make his process easy-to-understand?
By JD David