Leon Cooperman on 14 Attributes That Make a Good Portfolio Manager ~ market folly

Friday, July 13, 2012

Leon Cooperman on 14 Attributes That Make a Good Portfolio Manager

Leon Cooperman founded hedge fund Omega Advisors in 1991 and is now worth $2 billion.  The hedgie has listed 14 attributes that make a good portfolio manager in an article by Julie Steinberg over at FINS.  We wanted to highlight a few of the key attributes below and add some commentary:

Attributes That Make a Good Portfolio Manager

1.  The desire and commitment to be the best.  Cooperman lists this as his top reason and Julian Robertson of Tiger Managment would certainly agree.  In an in-depth interview, Robertson listed competitiveness as the top quality he looks for when seeding a manager.

2. Can identify his or her comparative advantage.  Cooperman asks, "What is that person's knowledge base? Are they knowledgeable about structured credit?  Where is their skill set the greatest?  Where does their expertise lie?  How can they capitalize on that expertise?"

This is right along the lines of what Warren Buffett has been preaching for years: invest in your circle of competence.  Not to mention, longtime fund manager Peter Lynch has also said to invest in what you know and even wrote a book about it.

3.  Thorough and penetrating analysis/in-depth research with a strong analytical foundation.  This, of course, is the backbone of managing investments. Dig into company filings, read the footnotes, do channel checks, talk to other investors. 

Third Point's founder Dan Loeb also said to get out in the real world and see what's going on.  He listed that as one of the lessons he's learned as an investor.  And of course, research both the bull and the bear case. Which leads us to Cooperman's next attribute:

4. Identify variant perception.  Cooperman asks, "Where does your view differ from the consensus that could spark the reason you're getting the return you're looking for?  You see things that someone else doesn't see."  This is also what Baupost Group's Seth Klarman attempts to do everyday.  It's important to distinguish between the herd's activity and the contrarian view.

Also, more often than not, investors seek out confirming information that reinforces their viewpoint.  Don't.  Instead, seek out the alternative view.  Berkshire Hathaway's Charlie Munger also favors this approach, saying to "invert, always invert."  Lastly, we've also highlighted thoughts from Oaktree Capital's founder Howard Marks on contrarianism.

5.  Have conviction with respect to investment recommendations and confidence to add to a position if fundamentals are intact but stock is down.  Cooperman says, "When a stock goes down and is not performing in a manner that's anticipated, you capitalize on the weakness.  If you know what you're doing, buy more ... be able to defend your ideas."

This one is easier said than done.  You have to be able to set emotion aside (seeing unrealized losses) and buckle down and do the work to confirm your thesis is still in tact.  This one almost certainly applies more-so to value investors as falling knives can be dangerous to catch.

6.  Good communication skills are critical.  Can easily write a several page summary of his or her investment views.  The Omega founder says, "People need to be able to communicate effectively.  They have to sell me on their ideas.  When I read something, I write questions in the margin and discuss them.  If you can't write, you're at a disadvantage."

This applies more to analysts than portfolio managers as the analysts are the ones pitching ideas to the PM.  In Sam Zell's advice on investing, he said that something is only worth buying if you can explain the thesis in a few sentences.

7.  Unbiased and willing to admit mistakes, skeptical, creative, curious, bold/edgy, able to take risk.  Cooperman has bundled a lot of adjectives in there but they're all relevant to the field of investing.  This harkens back to the old adage, "cut losses quickly" if your thesis is not working out.

While the ability to take risk is key, you also need to know your level of risk tolerance and how to manage risk.  This tolerance is often discoverable under the point of most stress when a position is moving against you.  Can you still sleep at night?  Set emotion aside and think rationally.  It certainly helps if you always look at things on a percentage basis rather than in absolute dollars. 

For the other 7 attributes Leon Cooperman says make good portfolio managers, head over to the full list at FINS.

And for further resources on how to become a better investor, head to these posts:

- George Soros' best investment advice

- Notes from Seth Klarman's Margin of Safety

- Bruce Berkowitz's checklist for investing

- Lessons Dan Loeb learned as an investor

- Jim Chanos on the psychology of short selling

- Sam Zell's advice on investing

- Chuck Akre on good judgment in investing

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