Why Hedge Funds are the Ultimate Talent Business (w/ Dr. Gio Valiante)
MAX WIETHE: I know you still have a very good relationship with the people you've worked with in the hedge fund industry, but I know you're former head performance coach at Point72. I do want to touch on a little bit of what you're doing now and what your view of the hedge fund industry was in working there? GIO VALIANTE: Oh man, it was fascinating. When I came to the hedge fund world, when I came and gave the talk at Steve's house that I had no interest in or I was not intending to work there, it was just to talk. What happened was interesting is the more people I started to meet, the more I liked them. Not at all like the stereotypes that I had heard about the typical Wall Street caricature and nothing like that at all. What I found at Point72 were very smart people, talent, and it's essentially a talent business, so high IQ points. Intellectually honest. The hedge fund world is a place, much like golf that exposes dishonesty. For example, in the game of golf, the way I think about it is if you take a soccer ball, and you put a hole in a soccer ball, you hold it underwater, you're going to see where the hole is. The bubbles are going to come out. In the hedge fund world, if you're overconfident, it will get exposed. If you're under confident, it's going to get exposed. If you're risk averse, it'll get exposed. If you're incapable of learning from your mistakes, the markets will punish the same mistake day after day after day. In other words, you have to be so good to make money in the hedge fund world. The people I was working with are so high functioning, same on a PGA Tour. On the PGA Tour, if you're Justin Rose, and you have to be so good to do the things he's done but in golf, if you're under confident, it gets exposed. Arrogance gets exposed, lack of humility, lack of accuracy. If you're not intellectually honest, if you make mistakes, but you start blaming other people, and externalizing your flaws, well, the game will punish that. By the time you're at the top of the domain, in golf or in the hedge fund world, you've solved so many problems in terms of what Abraham Maslow calls self-actualization or you're a high functioning individual. What I loved about Point72, where the IQ points, the horsepower, the intellectual honesty, the discipline, remember, the root word of discipline is disciple. Disciple is just a student. Self-discipline, if somebody is a student of themselves, so all over Point72 is just a lot of self-discipline. They have to study themselves to function at a high level. In athletics, see, athletes are geniuses in different ways. They are geniuses in terms of proprio perception. They know their bodies really well. They can feel things the rest of us can't feel. I worked with the best wakeboarder in the world, named Phillip Soven, the most decorated wakeboarder in the history of wakeboarding. If you ask Phil, hey, write this paragraph, he'd like, he's not a great, he's not great linguistically. He'll say, okay, well, what happens when you get out on the water and he'll hit away and he'll launch at 30 miles an hour, 20 feet in the air. I see he's somersaulting in the air and he's holding a rope, he can put the rope behind his back and if he's not grasping at the right way, he can make adjustments. As he's about to land, he could feel his body shifting and everything happens for him in slow motion. That's a type of genius. The type of genius that exists in athletics is really different than the type of genius that exists in the hedge fund world. After the 15-year run I had in sports, I was up for a new challenge. I get to spend time with the former captain of the Harvard hockey team at Point72. PhD in theoretical mathematics from Harvard, the editor of the Harvard Crimson, some of the smartest people in the world, every single day, which challenges my mental game. What I loved about Point72, and what I love about the hedge fund world in general, it's the horsepower, the rigor, the intellectual rigor, the discipline, and the intellectual honesty. MAX WIETHE: I love how you call it it's a talent business. Did you find that there were archetypes, that there were just people who were almost built for it, and then there were people who were maybe they had the pedigree, they had the editor, I'm not saying that this person, the person you referenced, they had the editor of the Harvard Crimson, they had the right last name, but they were just not cut out for it? Are there people out there who should maybe take a look at themselves and say, I'm not cut out for the market and that they should maybe go find a money manager? GIO VALIANTE: That is a fantastic way. I love that question. What I love about what I call achievement domains, achievement domains is anything that has a measurable score, but with a free market mentality. The beautiful thing about the PGA Tour is it's 140 spots every week and it's you against the golf course, you and 139 other people against the golf course, but there's no favoritism. Everyone tees off from the same spot. Everyone has to play the same course, like you're not able to file a hostile work environment claim against the golf course because it's too hard or against the gods because there's weather, it's just it's total free market mentality, entrepreneurship. If you're better than the next guy, you get paid and if you don't, you go home. It's just it's the free market epitomized, the ultimate free market. Well, hedge fund world is the same way but the beauty of an expository, what I call an expository market which exposes flaws is a lot of ways to get the job done. For example, on the PGA Tour, Rory McIlroy is the most talented player in the last 20 years. He's widely acknowledged. He rolls out of bed when he was six years old, picks up a golf club and he knows how to swing it. He's got the same swing today he had when he was six years old, and his body was built to swing a golf club and it's effortless. When you interview Rory McIlroy, and you say how much of your golf swing have you built, and how much of it is natural? He's like, yeah, I would say 60%, 70% of it's natural and the rest I have to work out. If you talk to someone like Jason Day, who's a former number one player in the world, 90% of his golf swing, he had to work to make it. He's a made guy, he had to build it all himself. It's not natural to him. You have this split between the naturals, and people who have to work really hard and develop strategies to participate in the game of golf and there's the full spectrum. Guy, Dustin Johnson's a natural. There's a Brooks Koepka, the current number one player in the world, he worked harder at the game than the others. Same in the hedge fund world, what you see is this. There are people, I'm thinking of a guy named Justin LaBelle, who is probably the most natural investor I've ever met. Naturally gifted intellectually, great memory, natural passion for investing, started trading stocks when he was 12 years old. He'll tell you the story that at summer camp, you will call staff from summer camp and say, hey dad, I need you to buy some IBM, it's going to pop. Articulate. He's a broad thinker. It's effortless, for him to participate in the markets, it's effortless. Here's the setup. If you come in and you try to make money in that space, you have to compete against Justin LaBelle. Well, how are you going to do that? Well, that's where the compensations come into play. All of a sudden you say, okay, well, I don't have the IQ points of Justin LaBelle has, not a natural the way he is, but I really want to do well. Well, I can compensate by being more organized or by having a better process. People are able to make money in these spaces by having the right compensations. Therein lies the old Socratic dictum of [indiscernible], know thyself. If you can know yourself and be intellectually honest, say, I don't hit the ball as far as Rory McIlroy, I don't putt it as well as Phil Mickelson doesn't mean I can't compete on the PGA Tour, I just got to figure out what I do well, and win that game. Same in the hedge fund world. What I found is if you lay great portfolio managers across, you have two gifted folks, the Justin LaBelles of the world, then you have other people who will say, you know what, I'm not gifted, but I'm just going to work harder. I'm going to sleep less, and I'm going to go to every meeting and every dinner, and just through effort, I'm going to overcome my own weaknesses. You have individuals next who say, you know what, I don't have the talent. I'm not willing to sleep four hours a night, but I'm a good evaluator and manager of people. I'm going to interview and hire great analysts, and put together a great team and manage my book by proxy, and that works. Then you have individuals who say, you know what, I'm not talented like Justin LaBelle. I'm not willing to sleep four hours a night. I'm not the best recruiter, or manager of talent, but I have been great with process. I know how to get organized and be religious about my process. I'll let the firm hire the analysts. I'll rely on smart people to manage risk and so forth, but I'm just going to run a great process. All of a sudden, you come to realize there's different strategies that work and that's the beauty of the free market, is you don't have to be born to do it. I was listening to an interview with Conor McGregor recently where he says, best MMA fighter, certainly the most famous, he said, there's no talent here. I have no talent, this is all effort. I'm obsessed with fighting, and that idea of being obsessed with something, if you can be obsessed with something, you can compensate for a lot of the things that you don't have. We talked about the top hundredth of a percent, not the top 1%, the top 100th of a percent of people with whom I've worked across domains, and there are things that feel-- Kobe Bryant As an example, yeah, he was talented but there's a lot of 6"6' guys with talent in the NBA. The way Kobe became Kobe, obsessive work ethic. There are stories of Kobe getting off a flight at 11pm, landing, going to the gym and staying all night, and the whole next day and going home for dinner, not leaving 'til they made 1000 shots a day and the work ethic is legendary. When Kobe passed away, you know what Tiger said he took from Kobe? It's just the mindset. It's the work ethic. Steve Cohen. Out of 10,000 tradable days, over 40 years, Steve Cohen took four days off because he was in the hospital. You look at the work ethic of a Conor McGregor, who says I think about fighting all the time, of a Kobe Bryant and the Mamba mentality, of a Tiger Woods, of a Steve Cohen. They're obsessed with the work but they're not workaholics, because in their mindsets, it's actually easy. It's harder to not work than to work because the passion is there. That's the interesting feature.