Don’t Be a Hero

September 15, 2015

There’s one piece of advice I’ve found all long-term successful risk takers follow. Stay humble.

The Greek philosopher Heraclitus famously said, “No man ever steps in the same river twice.” No matter what river we stepped in yesterday, today brings different water, different currents, and different conditions—in essence, a different river.

The smartest risk takers have a deep understanding of and respect for this idea. They realize that even if they masterfully crossed one river yesterday, today is a different day. It brings just as many challenges, and sometimes even more, because the more success you have, the less vigilant you become.

To be a humble risk taker requires managing a fundamental tension between conviction and doubt. You must simultaneously make a decision to move, yet realize that you may be wrong. Conviction without doubt leads to overconfidence and loss of control. Doubt without conviction leads to paralysis and inaction. Smart risk takers balance both.

Wall Street is rarely considered a humble place, especially since the financial crisis of 2008. To many, the industry is rife with egotistical and reckless professionals. Having spent a fair amount of time with people on Wall Street, I can’t say the reputation is totally unfounded.

At the same time, some of the sharpest, most thoughtful risk managers I’ve ever met have been on Wall Street. These are people who did well before the financial crisis and have done well since it. You rarely hear about them because they tend to keep low profiles.

The Wall Street firms I know best, and have worked with the most, are institutional money managers. These firms invest money for endowments, pension funds, and insurance companies, among other large organizations. This kind of business is one of the most attractive in finance because the payoff for success is extremely high. However, it’s also one of the most brutal because the price of failure is equally high; a couple of bad years usually means the end of your career, often before it ever gets started.

Talented money managers usually have a high degree of intelligence, an analytical mind, and a steely set of nerves. These skills help them identify new ideas, pick them apart, develop conviction as to whether or not to invest, and then make strategic decisions.

Unfortunately, having talent isn’t enough to succeed in money management, a business that is littered with talented people who’ve been chewed up and spit out in the blink of an eye. Veteran money managers will tell you that the difference between the talented managers who succeed and the talented managers who don’t is humility.

The archetypal downfall of a talented money manager often goes something like this. The manager makes a few good investments and starts to feel confident. His ego grows, and he mistakenly starts to think he’s smarter than other people. Before long, believing that he has a golden touch, he starts taking irresponsible risks, not giving himself room for error if a trade turns bad. He isn’t worried because he’s confident that he’s right. Eventually, one of his trades turns bad. That fact alone isn’t a problem; everyone has bad trades. His problem is that because of his ego, he bets too much too fast on that single trade, trying to hit a home run. He ends up losing tons of money, sending his portfolio into an unrecoverable tailspin, and putting himself out of business, thus making it nearly impossible for him to ever get back in the game. In the end, it’s not his mistake that brought him down; it’s the fact that he thought he couldn’t make one.

“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” This is advice from legendary investor Paul Tudor Jones in a 1987 PBS interview after he successfully navigated the Black Monday stock market crash. Twenty-five years later, Tudor Jones is still among the most successful money managers in the world. Asked in that same interview, “When did you turn from a loser to a winner in your investments?” Jones answered, “When I was able to accept being wrong.”

“The best investment managers are wrong about 45 percent of the time,” said Dan Sundheim, a top money manager who also happens to be my cousin. “That’s the nature of our business, but a lot of people struggle with that fact. They think they have a brilliant ‘can’t lose’ idea, and it blinds them in really destructive ways. They might bet too big on it. Or they might stay in a position long after they should have gotten out of it. They lose their objectivity and judgment because they find it hard to admit that they might have made a bad call.”

It’s a recurring theme you hear from longtime money managers. Overconfidence is the kiss of death. When interviewing people for his fund, it’s one of the first things Sundheim has his antennae up for.

“We’re looking for people who can have strong, insightful ideas while simultaneously being open to the possibility that they’re wrong,” he explained. “It might seem contradictory, but it’s a really important tension for people to be able to manage. If people can’t challenge their own assumptions or aren’t open to other people challenging their assumptions, it’s usually a bad sign.”

Sundheim makes a point of challenging his own thoughts and strategies daily. Even if he feels that his analysis of a new idea is spot on, he actively seeks in-depth critical feedback from his team and his peers.

“Thoroughly pulling apart an idea and looking at it from every angle is the only way to get the detailed insights we need to make smart decisions,” Sundheim explained. “There’s no room for big egos. If one of us makes a bad bet, it affects all of us.”


Excerpted and adapted from Taking Smart Risks