Dare to Be Great: How to Find Alpha

Dare to Be Great.

“Dare to Be Great,” is a memo written by Howard Marks of Oaktree Capital Management; it has transformed the way I think about investing. If you have not read this memo and have an interest in investing, you should go read it now. What I love about this memo is not just the advice that Marks delivers on investing, but rather on the mindset and strategy he uses in obtaining superior outcomes. I have tried to adopt this mindset and approach to anything I want an above-average outcome in.

In the memo, Marks uses a two-by-two matrix to describe his approach to investing:

Two-by-Two Matrix

The philosophy of the matrix is this: using conventional behavior, at best, will give you conventional results; and using unconventional behavior will return you with either above or below-average results. He states that if you define investment success as “being average or better,” 3 of the 4 cells of the matrix provide an adequate outcome. If you define success as being superior, only 1 of the 4 cells has that outcome. Also, unconventional behavior exposes you to below-average results.

Thus, unconventional behavior is symmetrical; you cannot strive for superior outcomes without having the risk of being worse off. Any non-standard behavior will add value if it is right, or will diminish value if it is wrong. Therefore, the key to finding superior returns is having alpha: a superior skill or insight, which will allow you to find to asymmetrical outcomes. Essentially, Marks defines asymmetrical outcomes as your upside outweighing your downside. Therefore, your expected return is greater than zero. On the flipside, using conventional behavior, your expected outcome is zero.

The same is true when someone is trying to get an investment banking job. Using the same approach as every other student by trying to perfect your resume and cover letter and then applying to the ‘black box’ of the recruitment process, may end in a job or not. On the flipside, cold calling hundreds of investment bankers, could result in you establishing long-term relationships and having multiple job offers, or it could back fire and you could piss a lot off bankers off and be black listed. But one thing is certain: you will stand out either positively or negatively. The key to succeeding is finding alpha.

Originally published on breakingbaystreet.com