“It’s not the years, it’s the mileage”

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I have been doing this for over 30 years and have learned a lot of lessons, some the hard way. On reflection, there are too many to count. I recently took to LinkedIn to post a select few lessons learned from my former boss, Ned Johnson, the former Chairman of Fidelity Investments. What I wrote didn’t break new ground – several other legendary investors have opined on the same lessons – but what surprised me was the huge response I got from that post. I guess some lessons are worth relearning again and again. Here is what I wrote:

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• Bet big on your convictions

• Focus on the signal, not the noise

• See where there is opportunity when everyone sees fear

• Adapt and embrace change – rigidity kills alpha

• Be humble – the market is smarter than you

 

Bet Big on your convictions

The strategies I have managed throughout my career have been actively managed and concentrated (40-50 stocks). Compare this to large cap equity peers that have 70 to 100+ stocks. What is implied in a concentrated portfolio is that the stock bets you are taking are bigger and can have a bigger impact, so you better be right! Conviction comes from really understanding the company you are investing in. This goes beyond an earnings model and requires a deeper understanding of the business model, the industry, and the motivations of management. Over 12 years ago, I spent a tremendous amount of time trying to really understand the business models of the fastest growing companies at that time – Apple, Amazon, Facebook, Google, and Netflix. This was before they were the Mag 7, or even FAANG. That research time and the decision to buy those stocks proved to be consequential. These platform companies eventually became part of probably the greatest investable trend in the history of the equity markets. If that sounds like hyperbole, plot the market cap and free cash flow contributions of these stocks to the overall market over the past 15 years. You will also conclude that we have never seen anything like it. The deeper the understanding you have, the more conviction you can have. At the Fidelity Family Office, where we were able to take long term views on our equity investments, I used to describe our approach as “a private equity approach to public equity investing”. We took our lead from Ned, who was one of the great private business builders.

 

Focus on the signal, not the noise

With long term capital, came the ability to focus on the signal, driven by the underlying fundamentals of a company. Warren Buffett talks about the stock market being a weighing machine in the long term, but a voting machine in the short term. Signal and noise are conceptually the same thing. Over my 30 year career, the noise has definitely gone up: the rise of passive investing, algorithmic trading, hedge funds, and systematic strategies – the “flow”, as Keith McCollough, CEO of Hedgeye, likes to say – can be overwhelming and distracting.

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Ironically, over the 15 plus years I was at the Fidelity family office, I had more freedom and time to educate myself on the interconnected nature of asset markets – global equities, bonds, FX, commodities. I listened in on morning calls with FX and commodity traders, I attended emerging market and credit conferences, and I travelled all over the world. It was during this time that I discovered Hedgeye’s macro investment process, which ultimately became a very important part of my multi-layered investment process.

By understanding the noise, I was better able to distinguish between the factors that mattered and the ones that didn’t. Most of the time, the noise does not matter. Investors can get lured into reacting to the latest headlines or market narratives. The best investors know what to focus on and when to focus on it - as they say, the knowledge will set you free.

 

See where there is opportunity where everyone sees fear

To “buy when there is blood on the streets”, is not easy. No one rings a bell at market bottoms and tops. From my experience, there are certain sentiment flags that usually are good tells when markets get overdone in either direction, and even then, markets can continue to defy logic, or perceived logic. I have been through several boom/busts cycles – from the internet boom/bust (late 90s/2000), the housing boom/bust (mid 2000s), the Global Financial Crisis (2008/09), the European debt crisis (2011), the Chinese stock market boom/bust (2015), COVID (2020), the meme stock bubble/bust (2021/22), and most recently, the Liberation Day tariff sell-off. Each one was different and painful to go through but embedded within were valuable lessons. What doesn’t change is human psychology, which drives sentiment and positioning, and that drives market extremes.

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There is no such thing as “reversion to the mean”. However, there is such a thing as “reversion to the extreme”, whether applied to a market or an individual stock. Understanding that there is asymmetry to risk and embracing that helps you make better investment decisions, allowing you to be open to buying opportunities when no one dares to take a risk.

 

Adapt and embrace change – rigidity kills alpha

The investment world was very different when I started in this business in 1993. Even looking back the last 10 years, the change has been staggering. As an investor, I have had to learn brand new concepts and analytic frameworks to understand all this change – network effects, platform models, internet-native scale economies, accelerated compute, the influencer economy, the abundance economy, and how technology has removed business friction. We are now about to see another disruptive force reshape our world even further: artificial intelligence.

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Being a successful stock picker requires you to embrace change and adapt faster. Having an open, child-like curiosity helps. I have seen too many portfolio managers miss the next great growth stock because their singular focus on valuation clouded their appreciation of the speed and compounding of that company’s growth. Conversely, I have seen too many portfolio managers ride down huge declines in a stock, convinced they were right and the market was wrong. Stocks and markets price in information faster, so you need to adjust accordingly. There remains a prevailing view in our industry that changing your mind is perceived as a weakness – I disagree. Being able to change your view, based on new information, is a strength.

 

Be humble – the market is smarter than you

It is ok to be wrong and make mistakes. Recognizing your weaknesses and your biases opens you to be able to learn. Much of this business is about maximizing your probability of success, not necessarily about being “right”. In a now famous speech at Dartmouth in 2024, Roger Federer, one of the greatest tennis players of all time, talked about how he had only won 54% of points he played in his professional career, even though he had won 80% of those matches. When I reflect on my own career so far, in the 15 and a half years at the Fidelity family office, I underperformed the market in six of those years. More important than the percentage is the fact that the year following each of those poor performance years, I bounced back and outperformed. Having the humility to accept and understand my failures and then working harder to get better is one of the things I am proud of.

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The collective wisdom of the market is reflected in the price of a stock or a market, and it is marked to market everyday. Sure, it can be wrong in extreme situations. But I start with trying to understand the message from the market – back to signal versus the noise – rather than judging whether it is wrong or right. There is an intellectual arrogance to wanting to be “right” or prejudging outcomes, and those roads lead to investment failure. This may seem at odds with my first lesson on investing with conviction but they are not unrelated – being able to follow your convictions while recognizing the market’s message is part skill, part art, borne out of and stress-tested over years of experience.

 

I take these lessons, and many more, with me on this new endeavor at Hedgeye Asset Management. What you should expect on this journey with me are the same principles that Hedgeye is built on: transparency, doing things the right way, and the relentless pursuit to get better.

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Sincerely,

Sam Rahman – Portfolio Manager, Hedgeye Asset Management