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Soul In The Game

Few people have had as great an impact on me as an investor as Nassim Taleb.  A good friend gave me his book Fooled by Randomness on my thirtieth birthday in 2003.  In that book Nassim eloquently analyzed something I had struggled with for a long time: the role randomness plays in life and the stock market.  Fooled by Randomness is an easy and delightful read. I have read it at least half a dozen times, and every time I learn something new.  

However, the book that made Nassim a superstar in the finance community was The Black Swan.  In that book he took many concepts from Fooled by Randomness, expanded on them, and zoomed in on the concept of the black swan, which according to Nassim is a rare, unforeseen event with great consequences.   

Ironically, the timing of The Black Swan’s release was a black swan for Nassim, as it came out just as the Great Recession hit and provided an intellectual framework that helped to explain it, making Nassim an overnight sensation in the finance industry.  

His next book, Antifragile, introduced the extremely useful concepts of fragility, robustness, and antifragility.  I’ve written about antifragility to IMA’s clients and have shared it with my readers. You can read Part One here and Part Two here.  

And finally, Nassim recently released his latest book, Skin in the Game.  As my partner Mike and I were reading it, we were both deeply impressed by its central concept and ended up writing to our clients about it. I shared this essay with my son Jonah (and I will share it with my younger kids when they grow up).  I want them to choose a profession (it doesn’t have to be investing) where they can be artisans. As I look at my own father, he was an artisan all his life – not just as an artist but as a teacher, scientist, and inventor.  

When you love what you do your work stops being “work” and becomes a craft; and no matter what it is, you do it with pride, love, and care.  You have sacred taboos – things you won’t do because they would chip away at your pride of being an artisan.  And finally, money is never the goal but a secondary derivative… But I get ahead of myself.

P.S.  If Nassim Taleb is new to you, I’d start with Fooled by Randomness. It’s a gateway to his later books, which are anything but easy reads.

Soul in the Game

From Vitaliy:  

We (both Mike and Vitaliy) have been reading Skin in the Game by one of our favorite authors, Nassim Taleb. The point of the book can be summed up in one sentence: You want to associate with people who will share not only upsides with you but also downsides. When someone is getting paid to sell you a product but captures no downside in the transaction (this describes the bulk of Wall Street transactions), that person doesn’t have skin in the game, and his/her advice may or may not be in your best interest.  

We have designed IMA so that we have skin in the game. Our business grows and shrinks with our clients’ success. But our skin in the game doesn’t stop there. We feel that if a stock is good for our clients it should be good for us (including our significant others and our kids). Thus we and our families are clients of IMA, just like you, and our wealth goes up and down in tandem with yours.  

However, in reading Skin in the Game we have discovered that we can intimately relate to the concept Taleb calls “soul in the game.” He calls people like us “artisans.”  

Artisans, says Taleb, “do things for existential reasons first and for financial and commercial ones later. Their decision making is never fully financial, but it remains financial.”  

Warren Buffett says that he tap-dances to work. He goes to work not because he cannot wait to earn another billion – he is giving the bulk of his money away; he works because he loves investing. We can relate to this sentiment, investing is an incredible intellectual riddle that we have the privilege of attempting to solve every day. It is a never-ending journey of self-improvement. Neither Mike nor I have Buffett’s wealth, nor do we aspire to have it; but we feel exactly the same way about tap-dancing to work (though at times I ride a bike or drive a car to work).  

I dated a lot of majors when I was I was getting my undergraduate degree, but when I went on my first date with investing it was love at first sight. At first unintentionally and later intentionally, I sculpted the perfect job.  

If I won a $100 million lottery, my daily life wouldn’t change a bit – I’d just have to work harder to make sure my kids didn’t get spoiled. I cannot see myself doing anything else with my life.  

Thinking about investing and portfolios doesn’t just start when I come to work and stop when I go home. It always follows me around. It’s a bit unhealthy, and there’s always a tug of war between work life and family, but I still wouldn’t change a thing.  

We are not trying to build the largest financial firm; we are trying to build the best one, a firm we’d want to be the clients of (since we already are). We’ll stop growing the firm (accepting new clients) if and when we feel growth is becoming detrimental to this goal and thus to our existing clients.  

“Artisans also incorporate some type of “art” in their profession; they stay away from most aspects of industrialization; they combine art and business.”  

Investing is located at a quaint intersection of art and science. We strive to be both process-driven, disciplined investors and creative at the same time. My first two books focused on the investment process, the “sciency” part of investing. My next book centers on the importance of creativity, the “artsy” part of investing, which will become even more important in the future, as we’ll be competing against computers, not ETFs (not to insult them, but most ETFs have the IQ of a potato).  

“Artisans put some soul into their work: They won’t sell something defective or even of questionable quality, because that would hurt their most deeply felt values.”  

Mike and I built IMA not for altruistic reasons. We wanted a business that would provide for our families while we did not have to do any heavy lifting, we wanted to be comfortable in an air-conditioned office with lots of coffee. But importantly, we wanted to wake up in the morning, look in the mirror, and feel good about ourselves.  

We are acutely aware that many other professions, like nursing and firefighting, are more noble than investing other people’s money. But we are given an incredible responsibility to invest our clients’ life savings so they can afford to pay for their kids’ education and weddings and their own retirements. We don’t save lives, but what we do has an enormous impact on our clients’ lives. Therefore our approach to investing doesn’t follow the traditional Wall Street (institutional) playbook, which brings us to Taleb’s last point.  

“Finally, artisans have sacred taboos, things they will not do, even if they markedly increase profitability.”  

Over the years, with the advent of computers and consultants, an elegant but flawed theoretical framework, Modern Portfolio Theory, scientized and institutionalized investing. Large pension funds and foundations employ an army of consultants that slice and dice manager performance data (this where computers become very handy). Inflows and outflows in a manager’s fund are completely driven by his short-term performance, how he compares against his peers and benchmarks. This is not an abstract concept to a money manager, because his bonuses and employment itself are tied to the success of the assets he manages. He – it’s usually he – has a wife, kids, and bills to pay. These incentives are very powerful and turn institutional investing into the Wall Street version of the Hunger Games, where winning and staying in the game is often more important than what is right for the client.  

The concept of long-term doesn’t exist in this game: If you’re fired in the short term, who cares about the long term. Managers start emulating benchmarks – if you stray far from the benchmark “You are not doing what you were hired to do.” If you’re a large-cap growth manager, God forbid you find a stock that a consultant categorizes as value. What your peers own becomes more important in your buying and selling decision making than what will generate attractive long-term risk-adjusted returns (risk in this case being not volatility but permanent loss of capital).  

There is a welcome unintended consequence to managing separate accounts: We actually get to meet or at least talk on the phone to every client. When a client turns their life savings over to you and you know your decisions will have direct consequences for their life, playing Hunger Games never even enters into the equation.  

This is why our portfolio has a lot of cash. When the market is incredibly expensive and the foundation of the global economy is very shaky, the number of stocks that will provide good risk-adjusted returns declines. If we were playing Hunger Games we’d be buying stocks that we hated the least. The risk/reward of a particular company might not be attractive, but we could justify it by saying that out of the universe of bad investments this one is less bad. We don’t do this.  

There’s an old saying: Companies get the shareholders they deserve. It’s true of investment firms as well: We get the investors we deserve. We are lucky to have attracted clients who share our values. Our growth as a firm may have been slower than some on Wall Street, but growth for the sake of growth has never been our priority.  

From Mike:  

Many years ago I interviewed a young Russian immigrant who wanted a job as a securities analyst. He had no credentials, no experience. He was obviously very intelligent, but it was his passion to learn that convinced me. I challenged him to finish his education and complete the CFA program.  

He became not only the best analyst I have known but also a portfolio manager who understands the responsibility that comes with people entrusting us with much of their financial future. Vitaliy’s concept of “soul in the game” is a vital part of that responsibility, and I would like to think I helped him get there.

Vitaliy Katsenelson

I am the CEO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Even in Polish!)

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)

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