A few weeks ago, I was talking to a recruiter about a job at a hedge fund. We’d been introduced through a mutual friend, and he hadn’t seen my resume. So, after half an hour rehashing my background, skills, the market, et cetera, I decided to get it out of the way:
“Will it be a problem that I don’t have a degree?”
“No, not really. They’ve considered a few candidates without MBAs.”
“I don’t have an undergraduate degree.”
I never earned an undergraduate degree. Thanks entirely to this devastating career handicap, I recently spent two and a half years working as an analyst at one of the world’s best-performing hedge funds.
If you’re going to work at a top hedge fund, there are two courses of action I recommend:
- Getting a good GPA and test scores in high school, attending a target school, getting internships at prestigious banks, spending two years substituting Venti red-eyes for sleep as a junior banker, then getting an offer, or
- Getting unhealthily obsessed with stock picking at an early age, parlaying that into a terrible high school GPA and an unsatisfying college experience, then dropping out, working in a totally different industry, writing a blog and email newsletter about stocks, getting recommended to a portfolio manager by two different blog readers, and then getting an offer.
While choice #1 is very popular, and seems to work for the top 10–15% of people who pursue it, choice #2 worked 100% of the time for me.
My journey to SAC started with a book and ended with a coin toss.
How to Waste a Competitive Advantage: A Short Guide to High School
Over the summer before my freshman year of high school, I wound up reading Buffett: The Making of an American Capitalist. Then I read it a couple more times that summer for good measure. I’m not entirely why the story clicked for me, but it probably had something to do with Warren Buffett being a shy, unassuming nerd who managed to pile up billions and billions of dollars by locking himself in his room and reading all day.
I felt gypped. I’d been doing that for free!
After the third or fourth reading of Buffett, I ordered a big stack of annual reports and started reading those. I also started exploring the world of DIY investment research.
In a sense, I was in exactly the right place at the right time. The summer of 2001 was a great time to be a budding value investor with a modem and infinite free time. The Internet bubble had subsidized a whole ecosystem of websites for researching investment ideas and trading tips with other fans. MSN Money had a stock screener that I still prefer to the Bloomberg stock screener, which could easily spit out a list of low P/E stocks with high insider ownership and low debt. Yahoo Finance messageboards for $10m market cap stocks would have active threads from investors teasing out the latest nuggets of data from a company’s earnings releases. Value Investors Club — still going strong, still rocking that Web 1.0 design sensibility — sported detailed writeups from actual (pseudonymous) investors, and from amateurs like me. And Marketocracy offered a simple interface for test-driving a model portfolio, plus a forum for sharing and critiquing ideas.
If I’d gotten interested a few years earlier, I would have been swept up in the dot-com mania, would have started investing just early enough to lose everything, and could easily have concluded that stocks are a waste of time. If I’d been a little later, I would have missed the insane, rock-bottom valuations ascribed to everything-but-tech in the very early 2000s. But since I showed up in 2001, I got to see value investors vindicated over and over again: buying companies for less than intrinsic value really does work. Treating a stock like a share of a business really is the right approach. Doing due diligence, knowing who you’re betting on, really does save you money — and face.
In my case, my first favorite stock pick was a great lesson in investing in the wrong people. Actrade Financial Technologies traded at about ten times earnings, and it was growing at over 30% a year. They offered international trade financing: if you run a factory in Brazil buying some capital equipment from Japan, Actrade gives your Japanese seller some Yen and collects your Reais six months later, with interest. And it’s all online! What a cool concept! They’re doing an end run around the big banks, they’re cheaply hedging out currency risks, and they’re locking customers in: once you’re used to getting financing on all of your purchases, it’s hard to go back to stumping up cash. And since it’s a global business, you don’t have to worry about recessions. There’s always a boom somewhere!
One thing I should have worried about was that the company was a scam. (It was!) Over the course of a few short weeks:
- I declared it “the perfect stock” on a Marketocracy message board.
- Barrons ran a story summarizing the short case against Actrade, viz.
a. A decade before founding Actrade, their CEO fled Israel, leaving behind a lot of angry creditors
b. Their CFO was David Askin, who had run a hedge fund that collapsed, spectacularly; he settled with the SEC
c. They did terrible due diligence on their loans; one borrower bribed his lending officer with a $15,000 Rolex before defaulting on a $6.3m loan. (Which is a pretty solid return.)
- Forbes ran a story on the flourishing new world of stock message boards. It ended with a warning: “Not all the advice is good…” before quoting my Actrade stock pitch and noting that the stock dropped 50% in the next week once the Barrons story hit.
If Actrade bears are still wondering why they had such an easy target, now they know: the stock sounded like a pretty good buy to a fourteen-year-old.
I dusted myself off after the Actrade debacle, managing to both buy at a bad time and sell at the worst possible time, before investors ended up recovering a little of their money. (I lost around 99% of my investment, but whoever bought from me made around 1,000% when the company finally recovered some of the stolen funds and liquidated.)
After that adventure, I got more careful, spending a lot of time doing due diligence and deeper research. You have tons of free time in high school, as long as you economize on sports, extracurriculars, and homework.
So, after four years, I wound up with: good standardized test scores, an astonishingly bad GPA, and comprehensive knowledge of small- and mid-cap stocks. Sadly, the college application process tends to focus more on how good your parents have been at picking stocks.
When the dust settled on college application season I had received couple expensive offers from pretty good schools, and a full-ride offer from Arizona State University. Cannily judging the ROI on $0 to be approximately infinite, I chose ASU.
What does a nerdy kid who has never tasted beer or even seen a joint do at America’s #1 Party School? Well, I spent hours on the Internet, hours in the library, and a desultory few minutes on coursework. The school offered a subsidized trip to New York one spring, and I took it, decided I liked the look of the place, bought a one-way plane ticket back to New York, and moved to Brooklyn.
At Zero Before the Financial Crisis
New York is a very expensive city, but only if you plan on spending money. Allow me to present a monthly budget for the under-employed, circa 2008:
- Rent: $400/month for a room in a former crack den. My roommates snagged it when the previous tenants got arrested. They kept a baseball bat by the door.
- Rice and beans: $150/month
- Public Transportation: $76/month
- Cell Phone plan: ask your parents
- Health Insurance: don’t get scurvy
- Other expenses: defer these indefinitely
I wound up working as a recruiter, which is not exactly the best job for an introvert. I held on by the skin of my teeth until 2008, when Lehman brothers (50% of the firm’s revenue) blew up, followed shortly by Merrill Lynch (50% of the remainder). And somehow, at the bottom of the recession, I answered the right Craigslist ad and started working as a (paid, but barely) intern at an online marketing agency.
Like many online marketing agencies, this company was built by accreting onto a successful freelancer. When I joined, the agency’s global headquarters was coextensive with said freelancer’s two-bedroom apartment. My first interview was in the CEO’s office, which was also his bedroom.
When I joined, there were twelve of us violating the lease, zoning laws, and probably the fire code, cranking out websites and copy. The company turned out to be a rocket ship. By the time I left in 2011, the agency had around a hundred employees and leased an entire floor of an actual office building on Madison Avenue.
Their specialty, and thus my specialty, was “Search Engine Optimization.” SEO is, ideally, structuring a site such that it legitimately deserves to rank #1 on Google for terms relevant to the business. In practice, there are other, more popular ways to go about it. We tried to stay in between the two ends of the continuum: strictly honorable, but mostly ineffective, or brutally effective but extremely annoying to everyone else on the Internet.
SEO was tough then and is much tougher now, but it was great training in the practicalities of running a business, instead of the balance-sheet’s-eye-view an investor gets. Nothing drills in the importance of competitive advantage like being outspent 10:1 by someone with 100 times the brand recognition. And that’s what marketing agencies do every day: since online marketing is the first choice of the scrappy entrepreneur, you’re constantly working with underdogs to figure out how they can possibly outsmart their bigger competitors.
So working there was an education. At that agency, I built my first financial model (showing how much AdWords spend it would take a wholesaler to get to breakeven on their new online retail operation) and my second (showing whether or not I could pay my credit card bill that month if I also wanted to make rent).
I’d sort of forgotten about the stock market, but sort of not. Every so often, I’d read another investing book, dive into 10-Ks, then do the math and realize that even earning 50% on my portfolio was well below minimum wage.
Then, in early 2011, I read the tweet responsible for my career:
Demand Media. LinkedIn. Pandora. TripAdvisor. Yelp. For the first time since the end of the Internet bubble, Internet companies were going public. And here I was, with three years of experience in figuring out how Internet companies worked, how they broke, and how big they could get.
Digital Due Diligence
I developed a theory: in between 2011 and whenever hedge funds got around to hiring full-time Internet analysts again, they would need all the help they could get analyzing Internet stocks. And who better to help them than a former stock market junkie turned digital marketer?
I whipped out a few posts on my personal blog, analyzing Demand Media’s long-tail content strategy, LinkedIn’s endless efforts to rank #1 for users’ names, AOL’s acquisition of the Huffington Post, and more.
And I quit my agency job along with a friend. We went into business consulting with hedge funds on their Internet investments.
This turned out to be a terrible business. I have since learned a lot about marketing to hedge funds, and one of the most important lessons is that it’s insanely hard. Hedge fund managers are some of the busiest people on the planet. They don’t have time for coffee, they don’t have time for a quick chat, they certainly don’t have time for a sales pitch from someone who has grown an inch and lost thirty pounds since the last time he bought a suit.
So, Digital Due Diligence staggered from consulting with hedge funds to consulting with anybody who needed online marketing help. I underestimated how long it would take to break into the market, and spent my entire (brief) startup-founder career being a drag on my partner. (He has since founded his own digital marketing agency, which I still recommend unreservedly to anyone who wants to improve their online marketing.)
My one real contribution to Digital Due Diligence was an email newsletter. And this turned out to be a big deal.
The idea was pretty simple: I’d write up a quick bullet on all the important news that could matter to an investor in the Internet space and send it to anyone who could possibly care. For a while, it was weekly. When I realized I was sitting around in my apartment all day feeling sorry for myself, I stepped it up to daily.
And the newsletter worked! Not as a source of new business, but by generating a list of a couple hundred people who would read what I had to say, give me useful feedback on what was flat-out wrong or boneheadedly obvious, and, occasionally even forward it to someone else. One forward at a time, I built a healthy list of investor contacts. Not necessarily people who would need consulting right now, but people who’d know who to call when the time came.
If I’d had more runway, this business would have been self-sustaining after a while. But I didn’t. Fortunately, back at the agency I’d done some speaking gigs at big digital marketing conferences, and had met an entreprenuer who had recently sold his (SEO-based) company to Yahoo, and was now helping them get more traffic. He suggested that, if I were ever thinking about working for a big company, I should give him a call. As a fledgling entrepreneur, this didn’t sound appealing, but as someone wondering how to make the rent, it sounded like a great idea.
So after a couple months of startup life, with — once again — zero savings, I took an offer from Yahoo. (For, incidentally, about twice what I’d been making at the agency. Negotiating: underrated!) My job at Yahoo was to get search engines to send traffic to their media properties: Sports, Yahoo News, OMG (their gossip site), even my old microcap hunting ground, Yahoo Finance. As part of my negotiations, I was allowed to keep writing and keep consulting, as long as it didn’t interfere with the day job.
What is engineering at a small company is sales and diplomacy at a big company. Improving Yahoo’s traffic by even 1% would be worth millions of dollars, but selling all the right internal constituencies on a new plan is, well, equivalent in effort to closing a seven-figure sales deal. And that’s at the best of times. Yahoo was not going through a great time in 2011. On my first day, they fired their CEO. They put in a new interim CEO, replaced him with a new full-time CEO, fired him for fudging his resume, and added yet another interim CEO.
I left Yahoo after about nine months, but it sounds longer if I say I worked under four separate CEOs.
But that’s getting a little ahead of things.
A Lucky Break
Every month or two, I’d talk to someone about applying my SEO skills to evaluating an investment. These discussions didn’t have a great conversion rate, but enterprise sales is always difficult, especially before you have a track record. During one of these sales pitches, I ended up talking about private companies. Specifically, how I’d figure out how well Dropbox was doing:
“When you sign up, they offer you free space if you tweet a link to them. There’s probably a pretty consistent fraction of people who take them up on that, so if you want a rough customer count, you just run a Twitter search for the default text of the tweet and count them up.”
“You know, every time we talk I wonder why you haven’t gone to work for a hedge fund yet.”
“Well, if you know anyone who’s looking…”
And then we went back to talking about the plusses and minuses of different SEO tools, and how you’d use them to measure a company’s performance.
A few days later, I got an email. As it turns out, there was indeed someone at a hedge fund who was looking for a new analyst. And he was confused, because he’d asked his friends who he should talk to and two of them recommended some guy with zero financial experience and no degree. One had just had a phone call with me, the other had been reading my newsletter.
Interview Prep: Impostor Syndrome Is a Competitive Advantage
The interview process at hedge funds is notoriously brutal. There are sites, books, even courses on passing the interview process. I chose a book, Heard on the Street.
As luck would have it, one of my roommates at the time had also gotten a lucky break: he was working in consulting (hated it), but had scored an interview with Blackrock (expecting to hate it for a lot more money). We spent the first few months of 2011 swapping books, interview questions, horror stories. He’d get home from work, grab a beer, and “Suppose you have a beam balance and eight coins, of which — “ “ — have you ever actually seen a beam balance? And who bothers counterfeiting coins? You’re going to risk spending years in prison so you can manufacture quarters for twenty cents?”
After more or less memorizing Heard on the Street, I moved on to more general knowledge. Damodaran’s Valuation, the CFA level 1 workbooks, and every research report I could get my hands on. I pored over SAC’s latest 13F filing, the most recent snapshot of their holdings, and memorized as much as I could of the financials of each Internet-related company on the list.
Almost all of this was a waste of time. I didn’t get any questions on valuation. Nobody quizzed me on how much revenue Google made last year, and how much of it came from which country. No one asked me to price an option. They mostly wanted to know how well I understood how the companies actually worked, what I thought about Facebook’s latest ad features, or whether Yandex had a shot outside of Russia.
If I’d had better credentials, I wouldn’t have prepped nearly as hard. But without a college brand name or a banking brand name, you’re judged entirely on what you can do right then and there. Every successful person apparently suffers from Impostor Syndrome, the idea that you’re just faking it and everyone else really belongs here. (Now that Impostor Syndrome is widely-known, people suffer from Impostor Impostor Syndrome: everyone else just thinks they’re an impostor, but I really am one!) Having an unusual background really ramps up your impostor syndrome. Want to feel like you’re not supposed to be here? Just ask anyone else how they got here!
I did get one brainteaser during the SAC interview process. It was my last round, with a senior manager who’d been at the firm for a decade and who had probably interviewed hundreds of analysts. We did the usual discussion of my background, how the company worked, what they were looking for, and then:
“I’d like to make a bet with you. I have a coin here, that comes up heads 55% of the time and tails 45% of the time. If I toss the coin, are you willing to bet a dollar that it comes up heads?”
I paused. “Maybe. Can I inspect the coin?”
“No. It comes up heads 55% of the time.”
“Are you sure?”
“I should just trust you.”
“Can you just assume it comes up heads 55% of the time?”
“Okay. I assume. And yes, I take the bet.”
“Great. Will you bet $100?”
“Will you bet $10,000?”
“Great. Just wanted to check on your risk tolerance.”
A week later, I got the offer.
Career Alpha, Career Beta
One of the most broadly-applicable ideas in finance is the model of alpha versus beta. “Beta” is the return that you get from making a diversified bet on some asset class. For example, US stocks have historically returned about 9% a year, with a standard deviation of 19%. It’s pretty easy to get a higher return by accepting a higher standard deviation, and it’s pretty easy to get a lower standard deviation by parking some money in short-term bonds and accepting a lower return. “Alpha” is the return you realize in excess of the risk you take.
Defining alpha is hard, especially at the time. Lots of strategies generate great risk-adjusted returns by taking risks on extreme outliers. Think: buying the S&P 500, and selling insurance against a 20%+ drop in the S&P. In any given year, you collect your insurance premium, so you beat the S&P with lower risk. And then in 2008 you lose everything, unless you lost it in 2002, or 1987, or 1974. But some investors are able to generate alpha, without picking up a lot of beta: every year, they tend to turn a profit, and they do it without the tailwind of rising asset prices.
It’s very easy to find beta. An index fund will get that for you. It’s hard to find alpha: you have to identify mispriced risks. But everyone is already trying to do that; the price of an asset is everyone’s best estimate of the right risk-adjusted price to pay. So earning alpha tends to require doing something unconventional.
And alpha and beta apply to hiring, too. There’s a market price for Ivy League grads who have two years of banking experience, and it’s set by the companies who hire for exactly that profile. That demographic is smart and conscientious; if somebody is going to be the best at valuing a particular bond, or trading some stock, it’s probably one of them. But employers don’t get a free lunch: if you hire from a pool of people who share similar experiences, and all know each other, you’ll tend to hire people who will all make similar decisions — and they all make similar mistakes.
Hiring someone with a weird background, someone who gets rejected at the first-pass HR filter at every other company, is a non-correlating bet. And portfolio theory tells us that even if your non-correlating bet doesn’t do great on its own, your whole portfolio will do better if you take those bets.
If nothing else, you’ll have a better story.
What I Learned
Here’s how to get the job of your dreams while completely ignoring the standard path.
- Be lucky: be born in the right place and at the right time. I nailed this one!
- Be lucky: get targeted by a 99th percentile firm, even if you would have taken an offer from a 10th percentile firm
- Type, press ‘send’, repeat: I promoted my equity research and consulting with an email newsletter. Weekly for a few months, daily for a few months, then weekly again until I quit consulting to work at SAC. Writing 500–2000 words every workday, or even once a workweek, is exhausting. But it’s easier to sell when you’re reminding people of your existence at least once a week, and you’ll pick up opportunities when you’re getting forwarded around regularly.
- Exploit luck relentlessly: When I did luck out, I pushed every lucky break as hard as I possibly could. A value investor might call this only taking the high risk/return opportunities. A trader might call it letting winners run.
- Get five minutes of their time: credentials are a filter, but everyone knows that they’re an imperfect one. Type II errors are the bane of organizations trying to hire the absolute best people, because it’s easy to fire a false positive hire but hard to go back and find a false negative rejected applicant. Five minutes is about what it takes to sort someone into the crazy/flake bucket or the weird/good bucket. If you get five minutes of the right person’s time, you can save yourself four years.