Wow! What a quarter to start up an investment management operation! While Arete has certainly not emerged unscathed from recent selling pressures, we are extremely encouraged by the quality and quantity of investment opportunities we are finding. This is a great time to be a stock picker! We also appreciate the many risks and concerns in the market, however, and are always happy to share our point of view and to discuss what we see going on. Please always feel free to give us a call.
As we research and probe and reflect on recent market action, perhaps the clearest message we see emerging is how important it is to have sound investment principles. It is now abundantly clear that highly leveraged businesses are highly risky. It is also clear that there have been too many instances in which managers’ and investors’ interests have not been not well-aligned. Simplicity has its advantages and complexity has its risks.
In contrast, Arete has been designed from the bottom-up to be easy to understand and evaluate and ultimately be best able to serve its clients’ interests. For example, Arete has a very simple organizational and product structure so as to minimize potential for conflicts of interest. We have a very reasonable fee structure in order to preserve client performance. We have a sound investment philosophy and process that clearly guides us through all kinds of markets. And we strive to keep you informed in good times and bad.
We hope you find our proposition compelling and welcome any feedback you may have!
Amidst all of the turmoil we have witnessed in the markets the last few months, and in light of our debut newsletter, there is a whole host of topics I could discuss. Since we have all heard too much of the talking heads blather on about the financial crisis, I think this is a great chance to take a different tack and instead reflect on the timeless topic of judgment.
Whenever I step back and try to boil down which one or two things are absolutely essential to a sustainably successful investment management effort, I keep arriving at good judgment and decision-making. This is not to say there aren’t other important factors, or that there aren’t a lot of things that go into making good judgment. The point is, if judgment is absolutely critical to investment success, then it behooves us to do everything in our power to pave the way to being ready, willing, and able to exercise good judgment. The following are my thoughts regarding judgment and decision-making in an investment management environment.
The path begins with a credible investment philosophy. Such a philosophy should lay the foundation for how the entire firm views the markets, defines market inefficiencies, and describes how those inefficiencies can be exploited. Without a solid philosophical foundation, it is virtually impossible to productively deploy analytical resources.
The path to good judgment continues with good information. We view the goal of good information not so much being to accumulate more and more information, but to identify the most relevant information and to get the best information and ideas to “bubble up” to the top. We believe this happens best through actively engaging in dialogue about thoughts and ideas.
Good information is a function of good sharing which is a function of company culture. We believe the best way to nurture a sharing environment is by continuously expressing behaviors that engender communication and idea-sharing. While many talk of “creating” a certain culture, we believe that view is too simplistic. Instead, we believe culture emerges from behaviors. In other words, you can’t create a culture without embracing and personifying it; you need to “walk the walk.”
It is also important that good judgment gets parlayed into effective decisions. Part of this depends on ensuring correct incentives are in place such as aligning interests and minimizing or completely avoiding conflicts of interest. It is also important to note that decision-making can be improved by studying the lessons of both good and bad decisions. In fact, a substantial body of literature exists regarding biases, decision-making heuristics, and the importance of context and incentives. These lessons are quite useful for anyone driven to optimize the quality of decision-making.
Finally, we believe an often under-appreciated element of decision-making quality resides in the temperament of the decision-maker. At the margin, what is that person’s greater motivation – to deliver superior investment performance to you, or to enrich himself or herself? We often see clues to the answer reflected in compensation structures.
A cogent investment philosophy to define the nature of the investment task, a research effort that reveals information relevant to the process, and individual and institutional incentives in place to align interests, are all necessary, but individually insufficient conditions for good decision-making. We also focus much attention on the mechanics of decision-making because it is an inherently fragile process. Whenever the system is stressed by volatility, difficult markets, or other factors, the integrity and continuity of any of the above components can be seriously challenged and vulnerable to breakdown if they are not firmly embedded. Conversely, in good times, it is quite easy to get lulled into a sense of security and complacency which can allow for the relaxation of the efforts it takes to keep the system running well.
Every single aspect of Arete has been designed with these ideas in mind. It is certainly fair to say that Arete would not have been founded without a great deal of confidence in being able to deliver superior investment performance. That said, our challenge to ourselves, and the source of endless enjoyment for us, is to continue learning, adapting, and getting better every day.
In many ways, it feels like Arete has already accomplished a lot. The firm’s articles of organization were filed in January, it became registered with the state of Maryland in April, and began live management of its first portfolio in July. While I am pleased with how Arete is shaping up thus far, I also realize that this is just the beginning of what hopefully will be a very long journey.
It has been with a keen eye to sustaining this journey that I developed the business plan for Arete. One of the key features of this plan is to tightly manage costs along the way. By closely managing costs and converting some normally fixed costs into variable ones, I believe the chances for the sustainability of Arete’s business are vastly improved. I very much appreciate the fact that it takes time to thoroughly evaluate a manager and to reach a comfort level necessary to entrust one’s money to someone else. I firmly believe it is just a matter of time before many of you appreciate the value that Arete brings to the table. We plan to be there for you when you do.
Another comment I have is regarding my use of the words “we” and “us” in relation to Arete. To be clear, for the time being, I am the sole employee of Arete. However, I use “we” and “us” in describing Arete’s activities for a couple of reasons. Perhaps most importantly, Arete even at this early stage, already reflects the thoughts, insights, feedback, and countless other contributions of friends, family, vendors, and colleagues as well as the support of its clients. As such, I truly view Arete as a collective effort and therefore naturally refer to it in the collective voice.
Along the same lines, my vision for Arete is to grow and evolve into an organization that reflects the unique and special talents of each of its individual employees. It is also with sight of this vision that I refer to Arete in the collective voice. I apologize in advance for any confusion this may cause and hope you will grant me this liberty with the use of “we” and “us”.
Thanks and take care!
David Robertson, CFA
CEO, Portfolio Manager