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Page 36 Simeon Wallis

Page 36 Simeon Wallis people because of the financial rewards it traditionally offered. The past may not reflect the future, so someone considering an analyst role has to be comfortable that salaries may decline. I believe it’s just being cognizant that there has to be a true love for investing. A second piece of critical advice I have is the importance of removing one’s ego. Ego is the driving force behind most intelligent people’s mistakes. To quote Ryan Holiday, “Ego is the enemy.” It’s a desire not to look wrong in front of peers. It’s uncommon that the simple question that’s in the back of others’ minds is asked publicly. Nobody wants to look like they didn’t get an investment absolutely right. The more that a person can take ego out of the decision-making, I believe the further a person will go in this business. Understanding as early as possible what the most important question to ask that identifies the critical few data points or research topics that your superior—PM or senior analyst—focuses on will go a long way. Invariably, your boss, and to whom he or she reports, are your customers and if you make your customers happy, you’ll be successful. The better you can make them look, the better you’ll look. The mistakes that I’ve made have been not focusing my attention around getting the right information quickly so that I could have a deeper and more productive conversation. G&D: Do you have any thoughts on what the industry looks like when the shift from active to passive settles down a bit? SW: I still don’t know whether this is secular or cyclical and I believe we’ll learn this when stock prices decline 30% or 50%. Traditional active managers need to demonstrate their value through significant outperformance to justify their fees over the full cycle. If they can outperform in that environment, it will benefit the industry. If there’s not that significant gap between what an index and what active management is able to generate during a downturn, then fee pressures will continue. The cost structures of twenty or more analysts, a full sales team, and all the compliance is just not realistic unless the firm has hundreds of billions in AUM. I envision the industry ending up with more boutique managers that have between three and seven investment professionals, including PMs, who may have a little bit more compensation at risk. They’ll carry lower overhead and be able to compete more on fees. For investment management firms the incremental dollar that comes in really flows to the bottom line. There’s significant operating leverage. Assets have been trending down for active managers. Cost structures have to decline to mitigate the impact and labor is a large percentage of the cost base. I don’t know how valuable the tenth or twentieth analyst on the team, who covers a tiny slice of the market, really is, especially when much of the initial financial analysis can be done better with computer analytics. The value over time will come from the qualitative insights that drive performance. For example, the ability to ask specific questions of management teams, of industry consultants, of expert networks, that will have a lot more value going forward than the financial model. Active managers need to focus on the opportunities that won’t score well on factor models but where there’s a high probability of market-beating returns. “We want the best IRRs, and we’re willing to hold longer term and look like an ugly stepchild.” G&D: You mentioned cultural mismatch earlier. Any thoughts on that subject for students? SW: Culture is the most important thing to understand about a company, and to understand about one’s self. Everyone should understand his or her strengths and weaknesses, and seek environments that allow strengths to thrive. There’s a self-awareness component, and perhaps I didn’t have enough self-awareness earlier in my career. Every organization is political and understanding the politics of people and personalities is critical. Coming back to the difficult situation that I placed myself in, the nature of that organization was that there were strong egos. I tried to (Continued on page 37)

Page 37 Simeon Wallis overcome other people’s egos by arguing my perspective with objective, quantitative data; that wasn’t how arguments were won in that organization. I should have done a better job of finding former employees who had worked there to get a better sense of how decisions were made, and the relationship between senior management and others in the organization. There wasn’t an investment style difference, but there was a research difference, whereas at Evercore, I believed there was an emphasis placed on very deep-dive research, which tended to be very quantitative and analytical. Why is this number volatile? Why is that changing? Let’s go back four annual reports, make all the adjustments, normalize it, and understand what was going on in the spreadsheet, and let that analysis drive qualitative questions. it’s a great opportunity, it’s probably not the right opportunity. G&D: That’s excellent. Thank you so much again for your time. The San Francisco situation was a very small team. There’s a dichotomy in how organizations will handle differences of opinion—some say, “Culturally, we want to have a diversity of thought and opinion. While others will take the other side. “We want to make sure everybody is exactly on the same page when thinking about this.” I misread the situation. I thought it was the former, and it was more the latter. My strengths did not align with what they wanted for how their team was constructed. It comes down to culture and how much research you can do on your own strengths and weaknesses that tie into that culture. If there’s not a good fit, even if

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