What Portfolio Management Has in Common with CIA Covert Operations

Tweet

 

Earlier this month, we gathered with hundreds of private equity investors and other service providers for ACG Philadelphia’s M&A East conference in our hometown of Philadelphia. We had a great time telling folks about our shift to DocDep and some of our new applications. Overall, the conference was a great experience and taught us how smart portfolio management can guide decision making.

One of the unexpected highlights of the event was the keynote address by former CIA director Gen. Michael Hayden. Event speakers are sometimes bores, recruited more for their name recognition than an engaging delivery or resonant message. But the ballroom full of investors paid rapt attention as Hayden recounted a White House meeting on Syrian nuclear ambitions late in George W. Bush’s presidency.

Hayden recounted telling then-President Bush that CIA sources had tracked visits to Syria from international nuclear scientists known to be involved in weapon manufacturing. The agency also confirmed that the Syrians had recently built a lab capable of producing nuclear weaponry. But they could not definitively determine that Syria had a nuclear weapon or that it posed an immediate threat. In the wake of intelligence failures leading up to the Iraq War a few years earlier, Bush announced that the United States would not take action against Syria because they could not be sure what Syria had. Sure, there was some troubling data, but it was useless as information.

Portfolio management might not have the high drama and suspense of the CIA, but the message was clear to the investors in the audience: All their data is useless unless they can translate it into actionable information.  

Above image is a satellite photo of a suspected Syrian nuclear facility (later destroyed by an Israeli airstrike.)

This is where smart portfolio management can help investors. This approach takes the usual metrics that investors use to evaluate prospects, such as a company’s revenue, industry growth and debt, and connects the dots to create a useful narrative about the company’s past and projection for the future.  Smart portfolio management has several principles, but three of the most prominent are confirmation, context and creativity.

Confirmation

This is the most fundamental element of good decision-making and portfolio management. Neither covert operatives nor alternative investment managers can stake their decisions on a single data point or source. If one intelligence source says a nation has nuclear weapons, the CIA better check it out. Likewise, if one industry analyst says that a certain sector is bound to grow, managers know to test that prediction with other experts. But investors also must guard themselves against confirmation bias, which occurs when we notice or look for information that reinforces our first notion, instead of testing against equally valid and potentially conflicting information.

Context

Another key piece of portfolio management involves learning about the broader market and economic conditions surrounding an investment. Yale lecturer and global equity investor Vikram Mansharamani reminds us here that investing by the smartest conventional standards in Indonesia in 1997 would not have saved one from losing it all in the Asian Financial Crisis. Investors should be sure to look at the bigger picture before moving forward. Similarly, Hayden reminded us that any decision regarding Syria’s nuclear program would be made in the context of the intelligence failures and ongoing war in Iraq.

Creativity

No, this last principle does not refer to the creative accounting scandals that fell Enron, WorldCom and other companies in the early 2000s. It instead refers to smart portfolio management that helps investors see new opportunities outside of their current wheelhouse. Creative portfolio managers anticipate the new changes in technology and consumer demand – much as Steve Jobs did as he built Apple into one of the world’s biggest companies. As for creativity in Gen. Hayden’s line of work, well, that could be seen as the Arab Spring. Protester from within Syria and other Middle East nations are addressing the security threats and repressive regimes on their own, with limited or no U.S. military intervention.