An excerpt that I found very interesting:
…one of the things that’s vastly different from being an analyst to running your own fund — and I can’t emphasize this enough — is that they comprise incredibly different skills. The inability to think about risk the right way may not matter at all for an analyst. We’re not asking for their judgment on risk, we’re asking for analysis and facts, and then secondarily, their opinion. It’s the portfolio manager who eventually needs to be able to identify risk, whether it’s an excessive concentration, a failure to diversify, a failure to hedge, or a failure to understand the risk that is sitting right on your shoulders and you don’t realize it. Failure to recognize those things can kill people. I think we’ve had a few analysts that have disappointed, but no real disasters. But I have observed people that have had shockingly bad judgment in running a portfolio at other firms, and I think those almost could never have been identified a priori. The hard thing to swallow is the realization that your very smart analyst is not able to think well about the bigger task.
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Related post from last week: Seth Klarman Letters: 1995 - mid 2001
