An old boss of mine once said that in the investing world, it paid to do favors for people, because you can never tell what good will come from it. I have read an advance copy of Timothy Sykes’ forthcoming book, An American Hedge Fund.
Aside from our common love of investing, it is hard to find similarities between Mr. Sykes and me. He trades rapidly and aggressively; I trade infrequently. He relies on momentum; I resist momentum. He became a professional investor early in life, and has always worked for himself; I became a professional investor later in life (38), and have always worked for others. Loss control for Mr. Sykes is a fast hand on the sell button (or the buy button if he is short); for me it is diversification, margin of safety, etc.
I have always maintained that there is something to be learned from analyzing those that do not invest like I do, particularly if they are successful by means that strike me as unlikely. I learned seven lessons from the book:
1) One thing that I share with Mr. Sykes is understanding where my edge is. Early on, Timothy Sykes figured out that he had an advantage in analyzing the technicals in micro-cap stocks. He pressed that advantage assiduously, and did exceptionally well, though with significant pullbacks.
2) Another thing that I share with him is that I don’t give up easily. He persevered through some drawdowns that would make most people give up.
3) The book helps reinforce the lesson of sticking to your edge. If you’re a momentum guy, don’t try to be a fundamental investor, and vice-versa. Once you know your edge, stick to it. If you don’t, your results will likely suffer.
4) Another lesson that the book holds is the psychological differences in running other people’s money. It ain’t easy; risks that you are comfortable taking for yourself, you might not be comfortable taking for others.
5) As a professional, one must investigate the carrying capacity of the edge that you employ. How much money can you run before your strategy stops working?
6) Is a great investment strategy and track record enough to start an investment firm? Early money is hard to come by. There are many who contribute only when a firm is obviously successful, and few that will contribute to a fledgling firm. Also, good fund marketers are hard to come by at a reasonable price, if they exist at all. So far in my life, I haven’t met one.
7) The last lesson: do what you are good at; do what you love, but recognize realities. There are times when opportunity knocks, and times when it doesn’t. Pursue the advantage you see in front of you, until a better advantage presents itself.
In summary, I enjoyed An American Hedge Fund. Through the lens of Timothy Sykes, I got to see the creation of an investment process, a hedge fund, and all the difficulties that go along with it.