“If you want to outperform the investment business, you need to surround yourself with a culture that facilitates investment performance.”

Chris Crawford, Crawford Fund Management


 

I enjoyed a great conversation with ValueConferences instructor Chris Crawford on the Art of Contrarianism while in Boston.  Chris Crawford is the Managing Partner and Chief Investment Officer of Crawford Fund Management, which he founded in 2009.  Chris previously headed the Boston office of Stark Investments, a $10 billion dollar multi-strategy global hedge fund.

Below, Chris explores two (contrarian) factors that have contributed to his organization’s long-term record of success:

If you want to outperform in the investment business, you need to surround yourself with a culture that facilitates investment performance and that is not the culture of most firms.  Otherwise, you would see a lot more outperformance.

 

You need to have a lot of quiet time to think, read, study, and analyze.  It is very difficult to outperform when in a chatterbox culture where everyone is sitting on a trading desk, watching flickering stock prices, and debating whatever news item is flying across the tape.  Instead, a librarian-like culture is important where one has the ability to study, to decide what information is relevant, to take the time to put it together, to collaborate with colleagues in a methodical way to assess that information, to critique it, to be Socratic, and to debate these ideas with the team.

 

Another critical element is how mistakes are handled.   People are afraid, in many investment cultures, to make mistakes because it can damage one’s career, reputation, and credibility.  The typical instinct of an analyst who has taken a big loss is to try to distance himself from the loss by downgrading the stock — after it has fallen — so that no one asks the analyst anymore about it, because the analyst has downgraded it. It is important, instead, to realize that investing is just like playing baseball; one should expect to strikeout a certain percentage the time.  No batter will ever get on base seventy-percent the time and the same is true in investing.  One will make mistakes and an organization needs a culture that says that there is a certain error rate in this business and that one learns from mistakes.  However, there is also random noise.  Sometimes, one will make the right decision by taking a swing and simply miss — while at the same time controlling the risk with a position size that is appropriate; the miss does not damage the greater enterprise.  It is not optimal to be perfect.  Instead, one will always have an error rate and one must be able to acknowledge that fact.

 

(Slightly edited for readability)