(MENAFN- ValueWalk) This is a killer talk I came across from Hedge Fund manager Mark Sellers, speaking to some Harvard MBA kids on what it takes to make it in markets. Regardless of whether you consider yourself a trader or investor, Mark's 'seven traits' apply.
Enjoy…
First of all, I want to thank Daniel Goldberg for asking me to be here today and all of you for actually showing up. I haven't been to Boston in a while but I did live here for a short time in 1991 & 1992 when I attended Berkley School of Music.
I was studying to be a jazz piano player but dropped out after a couple semesters to move to Los Angeles and join a band. I was so broke when I lived here that I didn't take advantage of all the things there are to do in Boston, and I didn't have a car to explore New England. I mostly spent 10-12 hours a day holed up in a practice room playing the piano. So whenever I come back to visit Boston, it's like a new city to me.
One thing I will tell you right off the bat: I'm not here to teach you how to be a great investor. On the contrary, I'm here to tell you why very few of you can ever hope to achieve this status.
If you spend enough time like Charlie Munger, Warren Buffett, Bruce Berkowitz, Bill Miller, Eddie Lampert, Bill Ackman, and people who have been similarly successful in the investment world, you will understand what I mean.
[bufffett]
I know that everyone in this room is exceedingly intelligent and you've all worked hard to get where you are. You are the brightest of the bright. And yet, there's one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor.
You have a really, really low probability, like 2% or less. And I'm adjusting for the fact that you all have high IQs and are hard workers and will have an MBA from one of the top business schools in the country soon. If this audience was just a random sample of the population at large, the likelihood of anyone here becoming a great investor later on would be even less, like 1/50th of 1% or something.
You all have a lot of advantages over Joe Investor, and yet you have almost no chance of standing out from the crowd over a long period of time.
And the reason is that it doesn't much matter what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that many people have and yet almost none of them end up compounding at 20% or 25% over their careers.
I know this is a controversial thing to say and I don't want to offend anyone in the audience. I'm not pointing out anyone specifically and saying that you have almost no chance to be great. There are probably one or two people in this room who will end up compounding money at 20% for their career, but it's hard to tell in advance who those will be without knowing each of you personally.
On the bright side, although most of you will not be able to compound money at 20% for your entire career, a lot of you will turn out to be good, above average investors because you are a skewed sample, the Harvard MBAs. A person can learn to be an above-average investor. You can learn to do well enough, if you're smart and hardworking and educated, to keep a good, high-paying job in the investment business for your entire career.
You can make millions without being a great investor. You can learn to outperform the averages by a couple points a year through hard work and an above average IQ and a lot of study. So there is no reason to be discouraged by what I'm saying today. You can have a really successful, lucrative career even if you're not the next Warren Buffett.
But you can't compound money at 20% forever unless you have that hard-wired into your brain from the age of 10 or 11 or 12.
I'm not sure if it's nature or nurture, but by the time you're a teenager, if you don't already have it, you can't get it. By the time your brain is developed, you either have the ability to run circles around other investors or you don't.
Going to Harvard won't change that and reading won't either. Neither will years of experience. All of these things are necessary if you want to become a great investor, but in and of themselves aren't enough because all of them can be duplicated by competitors.
As an analogy, think about competitive strategy in the corporate world. I'm sure all of you have had, or will have, a strategy course while you're here. Maybe you'll study Michael Porter's research and his books, which is what I did on my own before I entered business school. I learned a lot from reading his books and still use it all the time when analyzing companies.
Now, as a CEO of a company, what are the types of advantages that help protect you from the competition?
How do you get to the point where you have a wide economic moat, as Buffett calls it?
Well one thing that isn't a source of a moat is technology because that can be duplicated and always will be, eventually, if that's the only advantage you have. Your best hope in a situation like this is to be acquired or go public and sell all your shares before investors realize you donít have a sustainable advantage.
Technology is one type of advantage that's short-lived. There are others, such as a good management team or a catchy advertising campaign or a hot fashion trend. These things produce temporary advantages but they change over time, or can be duplicated by competitors.
An economic moat is a structural thing. It's like Southwest Airlines in the 1990s, it was so deeply ingrained in the company culture, in every employee, that no one could copy it, even though everyone kind of knew how Southwest was doing it.
If your competitors know your secret and yet still can't copy it, that's a structural advantage. That's a moat.
The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowe's.
Another source is the network affect, ala eBay or Mastercard or Visa or American Express.
A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here. A fourth and final
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