Wisdom from David E. Shaw: Part 1


Previously, we summarized an interview with Michael F. Price from Peter J. Tanous’ book Investment Gurus. We now move to the near opposite end of the investment style spectrum, to an interview in the same book with David E. Shaw, the ingenious and unorthodox founder of D.E. Shaw, a well-known and renowned quant fund. Although Shaw runs a quant strategy, he provides a number of unique perspectives within the chapter that I believe valuable to traditional fundamental investors. After all, cross pollination and being open to new ideas is a good thing.


Tanous: David, there’s something else that comes up when you talk to a lot of the successful managers. Many of them, especially the ones who are clearly superior to their peers, may well have a sixth sense of some sort, in additional to their other qualities. Now they’re all very smart, they’re all very disciplined, they’re all focused, but you wonder if there isn’t an undefinable something extra at work. I suppose instinct and intuition…

Shaw: I think you’re talking about what I think of as a sort of “right brain” thought process…What we do is similar to what a classical natural scientist does. You go out there and study some set of phenomena. Then, using that sort of experienced-based pattern recognition and creative thought that’s so hard to describe, you formulate a well-defined hypothesis about what may be going on…One thing I think is often misunderstood, not just about our type of business but about the nature of science in general, is that the hardest part, the part that really distinguishes a world-class scientist from a knowledgeable laboratory technician, is that right-brain, creative part. 

Food for thought: does analyst = laboratory technician vs. portfolio manager = world-class scientist?

Here, creativity again rears its head – from an investor that runs a completely different strategy from some of the others that we’ve covered, such as Howard Marks, in reference to what makes investors successful.

As someone who has spent countless hours speaking with different fund/portfolio managers, I suspect the reason why creativity keeps creeping up is in part due to the competitive nature of our business. The defensive moat described by Buffett is just as important for the investment management business as it is for a business that makes widgets. Creativity allows an investor to stay one step ahead, to discover unique mispricings before the crowd, and thus efficiency, closes in.

Unfortunately, there is no formula for creativity in the investment or portfolio management process. In fact, once verbalized, the concept of a formula for creativity sounds quite absurd! Alas, perhaps there’s hope in that the intangible creative process could be taught or learned over time?

Team Management

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