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What I Learned In My First Year At A Hedge Fund

A friend who I'll call "Eric" (because that is his actual name) offered these thoughts on what he learned about investing and work life after working at a prominent hedge fund. These are published with his permission.

A compilation of thoughts and ideas from value investing books, and my experiences at [a well-known value/activist hedge fund]. Of course principles are far easier to write down than to follow.

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About Investing

  1. The root of value investing lies in finding the intrinsic value of a company, and paying significantly less for it.
  2. To generate alpha, there are two essential components: a variant vantage and conviction in the intrinsic value. Investment success is a derivative of having conviction in that variance.
  3. A variant vantage is a product of creative research approaches. Conviction in your variance is a product of time spent exhausting those approaches.
  4. The market will offer you a different price on any given day; knowing when to enter and when to exit are the two most difficult parts. Often times we exit an investment too early out of fear, and often times we hold on to ones too long out of irrational hope.
  5. The price of a share of a company and the value of a share of a company are two fundamentally different things. Don't be tempted to invest at the wrong price, and don't sell your shares only because the price has fallen.
  6. Know your circle of competence and stick to it. Build your circle of competence on a daily basis, but always understand its limits.
  7. There will never be a stock with no downside risk. Understand both sides, and invest in stocks only with asymmetric risk-reward profiles.
  8. Investing is far from easy, but an investment thesis should be simple. Cut through the noise, and find the simple logic.
  9. Markets are filled with animal spirits. Logic has no room for psychology. Be a logical investor.
  10. At the end of the day, the goal is to turn a dollar into two dollars. Never lose sight of that fact.
  11. Seek a margin of safety.
  12. Admit when you're wrong.
  13. Understanding the expectations that compose a stock's current price and developing your own personal expectations to arrive at a different value, allow you to develop a convicting thesis.
  14. Expectations and realities are what drive the differences between a stock's price and its intrinsic value, respectively. Expectations are found through conversations with the sell side and management. Realities are found through primary research.
  15. There is an infinitude of available information and investable securities. Time is the scarcest of resources. Spend your time and choose your names with this in mind.

About Work Life

  1. Be a team player.
  2. It is never wrong to say you don't know the answer.
  3. Be honest and transparent always.
  4. You can always do a better job. Don't be afraid to ask how to do that.
  5. Experience can never be replaced.
  6. It's better to learn from others mistakes than your own (Warren Buffett).
  7. Success is bred from collaborative efforts. If you try to do everything on your own, you'll not only fail but have no one there to pick you up when you do.
  8. Have an acute awareness of new situations that you enter into. Awareness of your own strengths and weaknesses, as well as others strengths and weaknesses, allows you to gain help where you need it and be a better cohesive unit.
  9. Develop trust. Trust takes time, and it takes being selfless. Be selfless, and trust others. Once you build trust, your mistakes are honest ones.
  10. Get others to feel compelled to help you. Forcing yourself upon situations, regardless of the quality of work, will leave you on your own.
  11. Always review your own work before giving it to others to review. Just because you have finished a task, doesn't mean you've completed one. Analyze your work as if you were the manager.
  12. Develop a strategy for success after taking note of the goals of the firm, and that of your team. Keep expectations clear, and achieve those goals as best you can.
  13. Have faith in others, and over time they will develop faith in you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.