"Goodwill"- A Tangible Asset in Investing

My hedge fund class teacher, Martin Gross, manager of the Sandalwood Securities (a FoF specializing in distressed debt), brings in hedge fund mangers every week to talk to us. Next week is going to be Rob Lowenstein, author of When Genius Failed.

This week Mike Offner, the manager of Greenlight Securities’ fund of funds (value long short equities) came to talk to us. A Swenson protégé, he was very interesting and had a lot of valuable insights on the qualities that make great portfolio managers. He taught me a valuable lesson as well as an interesting quote about Wall Street that both got me thinking.

The quote is simpler. It’s one of Keynes' famous quotes, “It is better for reputation to fail conventionally than to succeed unconventionally”. There are so many market and non-market applications for that. For example, it explains why mutual funds often are so lousy since as long as you stay within a band of the average a portfolio manager is unlike to get many redemptions. Being risk adverse, this will be his goal. It’s really too bad for retail investors, and I have an essay on this I am going to post later. The direct result is it leaves more money on the table for the unconventional hedge funds and savvy investors.

The lesson is one I hope to take to heart if I’m ever in the kind of shoes of the decision maker of any fund or entity. The topic he was discussing was about work environment, and how he evaluates the work environment of other funds and whether that effects what he’s doing. His stance to paraphrase was,

“At Greenlight we don’t tear people up for making mistakes and yell at everyone; we don’t see such an environment as productive. We prefer that the funds we invest in treat their workers with respect and we often hear from various sources what’s really going on at different firms as people certainly talk. We see the funds with very high turnover and the ones where people only leave to retire. This has actually been frustrating in the case of Steve Mendel’s fund because no one has ever left to start their own fund. What a fund chooses to do is their choice, but I do know this, ‘if whenever someone makes a mistake, they are ripped apart and people are throwing phones’ it can become a real problem. The reason is when that person finds out about some really bad news they can either report it and get their head ripped off. However they may not want to face that so they can do one of two things, either hope the bad news goes away or hope they have left the fund before it hits.”

I found this observation very interesting and once I heard it, it seems so obvious. There are two parts to be being a good “manager” since hedge funds are so entrepreneurial in nature. It's one thing to have success, it is an entirely other one when you can achieve great success while maintaining integrity and respect for others. It's foolish to think that having those qualities won't have a positive effect on returns.