There’s Always Another Train Leaving the Station
Ask A CIO #46
I forgot to mark the one year anniversary of Ask A CIO! The first newsletter was sent out into the void on May 30, 2024. It was literally sent out into the void – I hit publish, and the newsletter was delivered to my two Ivy Invest co-founders and a handful of friends (who also gamely fed me the first sets of questions). I was not ready to share it with anyone else, so it just sat there in the Substack ether. I didn’t even tell my husband.
45 newsletters and a little over a year later, Ask A CIO reaches a mix of LPs and GPs. And in keeping with the original ambition, it also reaches individual investors outside the world of institutional asset management. I think many of you found your way here through a podcast or another publication, perhaps the Meb Faber Show, the Purse, AAAIM High ELI, or Money Guide on the Side1 – please accept this belated welcome, and thanks for reading! And in case you were wondering, yes, the newsletter now also reaches my husband, who likes to remind me that he does in fact read each and every one.2
This newsletter has given me a creative outlet to share my thoughts and perspectives, and I greatly appreciate all the feedback and questions that have been sent my way over the past year. Truly, thank you (and please keep them coming).
Funny enough, the most common question I receive in person, or as part of a podcast or event interview, is one that has never entered my Ask A CIO inbox. But I assume that if it’s being posed frequently elsewhere, it would also be of interest to everyone that joins me here. So here it is.
Can you share an investment mistake, and what were your lessons learned?
I appreciate this question because there is enormous value in discussing mistakes. And nothing stays with you quite like the decisions you wish you could take back.
When I’ve previously answered this question, I’ve typically used a specific example. But when I reflect on that example, I find the whole discussion rather unsatisfying. An unavoidable challenge of diving into any one example is that the details can distract from the more useful universal lessons, the insights that carry over outside of those particulars.
I’d like to offer a better answer here. When it comes to investment mistakes, there’s one behavioral pattern in particular that I’ve seen play out over multiple instances. And not just in my own work. Get a few LPs together over drinks, and if we’re being honest, most of us will admit to having been down this path.
It’s the excitement around the “hard-to-access” but also hard to diligence manager. The one that [choose your big name LP] is invested with, alongside an LP base of over [choose your %] endowments and foundations. The manager is interested in taking in new capital, but only during a narrow window. The investment opportunity presents just enough urgency – sometimes real, sometimes manufactured – to trigger FOMO.3
Almost always, the manager is opening up for new capital after a period of exceptional recent performance. And this exceptional performance is repeatedly emphasized during the diligence process.
Speaking of the diligence process – this is where I want to draw a clear distinction.
There are hard to access managers that, when they’re ready to take in new capital, run a highly efficient and transparent diligence process. Data is plentiful, key investment personnel are available, answers are thorough, and no topic is off limits. It is possible, even if generally not preferable, to do high-conviction, soup to nuts diligence work on compressed timelines.
It's the other bucket that leads to the mistakes. The hard to access and hard to diligence manager. Here, diligence is rushed, and access to information is tighter than usual. Conversations with the investment team are hard to come by. And when they do occur, it can feel like the manager is reciting a script. It may not matter what question an LP asks, the answer invariably leads back to a prepared talking point that is readily found in the pitch deck. And it probably includes a performance highlight or two.
As an LP, it’s obvious the diligence process is not meeting the usual standards, but the investment window is closing. The past performance (which is no guarantee of future returns!) is excellent. It’s uncertain when this GP might accept new capital next.4 Oh, and other smart LPs are doing it too. So, against better judgment, the LP says yes, even though it doesn’t feel quite right.
I’m fairly certain most seasoned investors have one of these in their past. I know I do. And if not, they might have one in their future.5
To counter the temptation, I like to repeat a hard-earned line from one of my favorite investors/mentors/people: there’s always another train leaving the station. If the work isn’t where it needs to be, if access is limited, if the process is overly rushed, it’s ok to pass. No matter how “hard to access” the manager might be. There will be other opportunities.
Although the experience I’ve described up to this point is distinctly institutional, I suspect it will also be increasingly relevant for individual investors. As individual investors are gradually offered greater access to opportunities outside traditional stocks or ETFs, they may encounter special access funds to name brand GPs, with only weeks to make an investment decision. Or SPVs for private investments, with limited windows until the SPV closes.
These limited time opportunities may be truly great opportunities. But any decision process should almost certainly rely on more than just past performance, the presence of other high profile investors, and/or the “exclusiveness” of the investment.
Thanks for joining this week, and as always, reach out to: askacio@ivyinvest.co!
See you in two weeks,
Wendy
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But do you also read the footnotes :)?
Add in an Investment Committee member who’s particularly enthusiastic, and it might seem like the bigger risk is in not participating. I may have once had an Investment Committee member declare a firm to be a “trophy manager.” It did not help the objective decision-making process.
Having done this long enough, there is almost always a next time.
If you’re a young allocator reading this who hasn’t yet made this mistake – even with me telling you here not to do it – you’ll still be tempted at some point. Hopefully you’ll see the pattern and resist!