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Paul Enright

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2021-04-20
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2021-04-20
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  1. “Think the analysis level is really interesting because I think there's two pieces to this. Two people can do the exact same digging, get the exact same information, analyze it the exact same way, but then synthesize it and focus on the most important thing differently. That's the step before deciding because then what they do at that synthesis is the deciding. Some people just have a way of processing things some of it's partially because of time horizon. They process something and they get stuck. They can't see past the one month negative. And other people look and all they can see is the positive once they get through this one month negative. And that just different frame of mind to make it more concrete for folks. If you think about where we are in the market right now, we're about to lap some really tough comps for some stay-at-home companies. And that's weight on them.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Have an informational edge is to just be around the same sector for a really long period of time because the accumulation of knowledge is perhaps the last great informational edge because everything else is out there if you're willing to do the work and dig and find and try to find it.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “You go back and you watch for pivot points where the company has changed how they report and whether that's a signal for how they think about the business. Those are all examples of great digging versus table stakes digging, which is, hey, I read the last two, 10 queues. I read the last three, 10Ks, I pulled the model up, I did some sell-side research, and I think I know the company. That might have worked 20 years ago. That doesn't work anymore. Can't do that. You're the least educated person on the stock in the room if you do that. You have to continually dig and find adjacent resources relevant for the competition. You find private resources. Go and find private companies that compete because they're not constrained in the same way that public companies are. And you've got to do that. You've got to pull forth as much information as possible. If you're really good at that, you can still get an informational edge. But really, I think one of the best ways.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Good diggers can be told what they're looking for, and then they go out and they find it. And that's table stakes. To be a great digger, you're told or you have a sense of where and what you're looking for, but then you iterate. You think out of the box and you don't go to the normal sources, you go and you find something else. You dig on regulatory filings. You go and you read the footnote of something that nobody else wants to read. model currencies in a way that other people are too lazy to model you go back to the original s1 filing and you read every subsequent annual report”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Gets in the way of the idea of having the great idea, or you can't reflect the idea the way that you want to because you've got to short out some element of it that at other firms you might not care about. And some people really figure out how to navigate that, but it's just another variable, another obstacle that you're putting in front of somebody who wants to be a pure stock picker. And that's a little tricky to do.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Placed by smarter people that I hire, but I'm comfortable with that. And that's always been more my style. I was a better portfolio manager of other people's ideas than I was as an analyst of my own ideas. And I think that that's partially because maybe I wasn't that good of a digger, but partially it's also because I think having a little bit perspective and being separate was good for me. For other people, they really need to control it. They want to do all the work themselves. They want to do all the thinking. And then they want to pull the trigger. And I think the way that that's different than perhaps being at a pod shop, you're going to do all of those works. But then you can also just cloud your thinking a little bit. And it's all of the great things that make a good company, a good company or a great company, a great company or a bad company under threat. You're doing all the same work, but because of all the risk that you put around it, you may decide that something else matters more.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Still developing this skill of digging, analyzing, but now you're deciding and you want to see what it feels like. And some people, they just get stuck there. They need that other person to help them. And some people just takes longer. The curve is longer. If you are good at that, then you have to decide, okay, do I want to work with an analyst as well where they do digging, they do the analysis, and I help them analyze, but I've completely started to outsource the concept of digging to them. Some people get scared. They need to dig. They need to micromanage. If you really want to progress and manage a fund, you have to figure out those things about yourself. For me personally, I function best when I'm the dumbest guy in the room. I really do. I like being around really smart people who do a lot of digging, and then I like to help them think through things. And I have a constitution that helps me to decide, which means that I'm eventually going to get disappointed.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “Michael Mobison has been influential to me where he points out there are two basic ones. There's security selection and then there's portfolio construction or sizing of positions. I think about it a little bit more nuanced on a progression. There is the process of learning how to pick a security and then pitching that to somebody else who has the ability to decide. And in those pitches, you learn and gain confidence and clarity of thought that's similar to Jeff Bezos' view on writing. So writing a pitch is similar to his view on writing something down and circulating inside Amazon because the clarity you get from writing that down and then you get instant feedback from the person you're pitching it to. And that process is iterative and it's great. And that's a great learning tool. And then eventually, if you're really good, you should try to manage some capital yourself where you're the sole idea generator.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Get any of that value out. And what we're going to do is we're going to lower the vol that you can produce in your portfolio. Therefore, we can put higher leverage on it. And if you can still produce returns with those kind of handcuffs on, then we will pay you a much greater payout ratio than we would pay you on the other side. And so the way that they get their risk is through higher leverage because they've extracted out all the other market risks. And then on the other side, and this is where you get dangerous, like if you're willing to take the factor risk, you're willing to take the market risk. You're willing to run a high net and you're going to run a high gross, you have to recognize you're going to have drawdowns from time to time and you better be careful to see them coming or react to them quickly. I say those are the two main differences. And it's always easier, I think, to compare them rather than to talk about one in isolation.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “That industry, and I'm up 100%. I think I'm the smartest person on the planet. But the reality is, I'm just lucky because I cover biotech. Had I been a top two or three decile stockpicker, perhaps I would have been up 175% versus 100%. And I think that matters for a lot of reasons. One is you want to understand where your performance is coming from, but also if you run these funds, you want to understand how to compensate people. And I think that what happens at a lot of the funds where they don't constrain your beta and factor the market neutrality, what they do is they let you run a little bit longer. They say those things are, but the value of those are going to accrue to the firm. We're going to let you run however you run, but then the value of that accrues to the fund, you get paid solely on the value that we're going to figure out a calculation to do that. Whereas what the pod shops do is they say, no, no, no, we're not going to let you even.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “The idea is that if you Underlying factors, whether they are growth, momentum, value, large cap versus small cap. And if you take those out, what's left over is pure stock picking alpha. And I think in concept, it's incredible because if you think about the other alternative, the other alternative is you buy a bunch of stocks, they go up a lot, and you think you're the world's greatest stock picker. And what you should be doing, and that's totally fine to do. And I do that, I'm more in that camp myself, but I do think that if you are in that camp, you should go and look at it and say, well, how much alpha did I add if I had just owned an equal weighted momentum basket? How much alpha did I add versus an equal weighted growth basket? Say I'm an analyst who covers biotech. And biotech as an industry happens to be up 100%. I pick the three average stocks in”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Also tricky because you may wind up changing your style to suit the model. So it's not as pure if you really want to be a stock picker. Then there are the folks that were trained the first bucket that are classic long short stock pickers and they spin out, they start their own fund, and then they can go back to making these intra sector bets and then they grow into being big enough again and then they go through the cycle and they do intersector bets. But that's broadly how to do it. I think that you could delve into each of those and say like different citadel and millennium have different risk models. So they're not exactly the same. And so I think of any one of those appeals to you, you can zoom in and double click on one of the three to find what exactly is nuance between them. But that's, I think, a relatively simplistic and easy way to bucket them together.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “Learned to adapt to their size, and they can still put up numbers. And when you're that big, those funds are more likely to run with gross exposure that sits in that 1.2 to 1.6 times leverage with net exposure that runs a little bit higher because they have less leverage so they can afford to run their net exposure a little bit higher. If you run at a decentralized pod, you are really unable to run that strategy because you have to run market neutral beta neutral, factor neutral. And so you are forced to try to run as much capital as you can because they want these funds are huge too, but to do it the way we used to do it. And that's hard. So it's really tricky. So what they do is they have this machine behind you so that you put on your fundamental trades and then they try to take out the factors that you are unintentionally exposed to. And that is.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Idea that I'm going to belong the best companies in a sector and short the worst companies in the same sector. But if you follow that logic all the way through and how this taxonomy grows over time, as we talked about as the industry evolves, the winners are usually large gaps and the losers are usually mid or small caps. And so if you have 15, 20, 30 billion dollars, it's hard to be long the winner and short the loser in the same sector. So what you wind up doing is effectively still being a stockpicker, but you pick sectors. So if you are going to a dominant longstanding fund, you're probably going to wind up having a portfolio that looks like I am long software and I'm long internet. I'm long secular winners and I am short retail and I'm short secular losers. Not because that's their DNA and that's what they choose to do, but because they've”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “The way that I talk about it when I'm trying to give advice to young folks that are trying to figure out what kind of fun would be attractive to them. And this is an oversimplification, but there are three types. There's the platform model and then there's the established manager model where they've been around forever. They're fundamentally driven. don't run with the same neutral characteristics that a platform runs. And then there are the new up-and-coming managers. But there are a whole lot of funds out there that are fundamental long short funds. They are trying to pick winners and short losers. And they have been around for a really long period of time, but they're bigger. And when you are bigger, you have certain constraints. You need market cap. If your traditional long, short fund was premised on the idea that I'm going to find winners and short losers, it was really premised on the”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “You buy your house. If you're 10 to 1 levered in your home and the value of the equity goes down 12%, you've got no equity left in your home. The same thing is true here. And so you have to guard against that and you have to know I'm going to have a really high gross exposure when I feel like the odds are on my side and I feel like I'm likely to produce a positive spread. And likewise, when I've had a huge run where returns have been great and I'm a little worried about producing a positive spread, then I'm going to pull my gross exposure back down. And therefore, if I produce a negative spread, it won't be something that could frankly cripple or put the value of the business at risk.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “ROE then is going to be determined by how much leverage you put on a long short spread. And mathematically, if you produce a positive long short spread, you can run with infinite leverage. And so that's how these folks get caught. Because if you go through a series where you're constantly producing positive spread, you keep thinking, well, if I produce a 10% ROA and I put two times leverage on it, that can turn it into a 20% ROE and a 20% ROE is better than a 10% ROA. And I want to generate higher returns. I want higher fees. And you do it and you keep doing it. And if you're a really good stock picker, 95% of the time you can generate a positive spread. The thing you have to be careful about is that 5% of the time when you generate a negative spread with all of that leverage, it's a force multiplier, just like it is in businesses, just like it is in anything.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “So, because we're shorting, because we're trying to isolate the spread between the two, you decide that there's a little bit more risk that you can take and you're going to throw leverage on. So then if you put the leverage on and now you've got an unlevered measure, call it long, short spread, that is loosely common parlance for people to think about it. That's something more akin to an ROA, a return on assets. Then I layer the leverage on top of it. And let's say instead of running a 50% short book and a 50% long book, let's say I want to run 150% of my capital in my longs and I want to put 100% of my capital in my shorts. That 150% long plus my 100% shorts, that's a 250% gross exposure. That's what people think about when they say gross exposure. Then I'm running 150 by 100 and I've got 50 net because so I subtract the shorts from the longs to determine my net exposure.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “And then I want to run less concentrated and I put 30 stocks into my short portfolio. The difference between the two is my long, short spread. That is an unlevered definition. That's just the average of the long performance versus the short performance. Then the question becomes, well, how much leverage am I using because I'm running two books? I could decide to use no leverage and I could put 50% of my capital in my longbook, 50% of my capital in my short book. I'd have 100% of my capital invested, but”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “Think the simplest way to level set everybody is to recognize that if you are working at a mutual fund, you're running at a long only fund, you manage a single portfolio of stocks, you own them. If you run a long short fund, you have two portfolios. You have a portfolio of long stocks where you're long the stocks that are similar to what you might do at a mutual fund, but you then have a completely separate short portfolio. So a single manager, you are managing two separate books. And the way that you have to perform is how you pick the stocks within each portfolio and then how those two portfolios interact with one another. And the difference between what your long portfolio does and what your short portfolio is spread. So if I put together my 15 favorite businesses in the world and I build a portfolio around them, and that's my long book,”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “Company in 2005, you might be short 2% of the company, and it was a meaningful position for your firm. Now, if you want to have a meaningful short and you have a lot of capital, you could be short 10, 15, 20% of the company yourself. It used to be a screen that, hey, look, I'm going to short X, Y, or Z company and we're short 1% of the company and there's nine other funds that are short 1% of the company too. So in aggregate, there's a 10% short on here. We have to be careful. It's heavily shorted. Now one fund alone. It could be 15% of the float. So you have to be careful about that. And that's perhaps maybe the biggest technical way that the industry, especially the long short industry, has changed over time.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “15 years earlier. It's so much more sophisticated around investing, around learning how to pick stocks, around security selection. You can go to business school and you can learn the art of the stock pitch. That didn't exist back then. And so I think that in Michael Mobison terms, there were easier games to be found back then. People were figuring it out on the fly and there was capital flowing into the space and opportunities and arbitrage is globally that you just don't see anymore because everything is more competitive. There's more technology to help you do what you're doing. And people are more educated and more sophisticated. And it's just more difficult. And then I would say the fourth piece, and this is probably the most important piece, is that if you ran a long short fund 15 years ago and your fund was a few billion dollars, that was a lot. Now, if you run a long short fund, you can run 30, 40, 50 billion dollars. When you were short,”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  23. “You're a company and you disclose any information to one person, you have to disclose it to everybody. You can't selectively disclose who you're giving information to. For example, let's say you're at a conference and you accidentally say something to a small group of investors, you need to put out an 8K revealing that information to everybody to make sure that everybody has it. And the information needs to be material. We're not talking about speculation or things of that nature. But if you say something about the quarter or say something about strategy that you may not have said previously, you've got to make sure that that information becomes widely available. And the person who receives the information has a burden of knowing that they've received non-public information and they can't act on it. That wasn't always the case. I think that's the biggest way that it's changed. And then I would say the buy side itself was unsophisticated. You didn't have the same type of education that you get. For instance, your education at Notre Dame would not have been the same had you graduated.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  24. “If you look at the period that predated me and in through the late 90s into the 2000s, there was a lack of sophistication around the organization of information. So this was pre-reg FD. This was pre-all SEC filings being organized online in a simplistic way. This was pre-sophistication with Microsoft Excel. This was before there were network research calls. This was before there was a whole host of databases that had historical financials. So you had to dig. You had to print out SEC filings. You had to go line by line and input hard data into Excel cells. You had to get on the phone and you had to talk to as many people as you could. The flip side of that also, though, was if you develop great contacts within companies, they were free to pretty much tell you whatever they wanted because there was not the same idea about insider trading back then until the laws really changed. So I remember being on.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  25. “It's a somatic experience. And in some ways, it's this fight or flight instinct inside you is constantly triggered and you're on the lookout for things that are going to screw you over. And where am I going to get this wrong? And you have this sense of paranoia when you first put on exposure and you live and die by every tick on the screen and it becomes really kind of crazy if you let it consume you. And so you have to develop habits and rituals and tools to stay away from the screen to get yourself back so that you can focus on doing the work and gain a little perspective and zoom out for every once in a while because especially at periods of volatility, it's a roller coaster ride and it can be very difficult to handle emotionally.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source

  26. “You can develop that skill set over time. In some ways, you don't know whether you have the tolerance for it until you've actually done it.”

    2021-04-20 · Invest Like the Best · Paul Enright - The Buy Side Primer - [Invest Like the Best, EP. 222] · IDENTIFIED FROM THE TRANSCRIPT · source