How I broke into the buy-side without a traditional background.

The road to getting an investing job is not straight forward, not instant and not easy. You know what they say: "Nothing worth having comes easy."

I've been getting a number of inquiries into how I managed to get a public equity investing job without doing any time in the sell-side, having a CFA, a finance major or having had a hedge fund uncle teach me about stocks at age 13.

In this essay I not only hope to tell you a story of my own personal journey to shed some light on the process but also share learnings that may be applicable to all kinds of career journeys.

Definitions first.

To clear up terminologies for the non-finance folks who happened to venture onto this article.

Buy-side depicts firms who manage and invest money on behalf of clients and/or the firm's partners. Three distinct categories are:

  • hedge funds (public market debt, equity, currencies and commodities)

  • private equity (infrastructure, private businesses, real estate)

  • venture capital (startups).

Things can get more complicated with more specifications but I'll keep it to this surface level. Just think of it as firms that "buy assets". Buy-side.

Sell-side depicts firms providing brokerage and other services to the buy-side. These are typically investment banks that provide the service of sales & trading, equity research and investment banking. They sell their services to the buy-side clients to aid them in the purchase and/or divestiture of assets. Sell-side.

My journey is focused on the "hedge fund" category in public market equity investing. 

Industry reality.

The fact is that getting into the buyside is hard. Just logistically. There is always more demand than supply. One person can manage billions of dollars. Look at Berkshire Hathaway. You have four dudes managing hundreds of billions of dollars. Heck, the team even works remotely with Charlie Munger residing in LA and Warren Buffet in Omaha. 

Per Graham Duncan, Co-founder of East Rock Capital, there are about 45,000 buy-side professionals with 1000 new folks entering the industry every year. The 1000 are out of about a pool of 6000 that consists of investment bankers with a sprinkle of lawyers and consultants, all from a wider pool of 100,000s of professionals that were selected from an even wider pool of university grads. It just means it ain't easy and the numbers aren't in your favour. My role had about a 0.2% acceptance rate. So yes, it's competitive but also just so much out of your control on when an opportunity will open up. There really isn't a "recruiting" season but rather an opening when someone else has left or the fund has gotten hundreds of millions of dollars more. 

Default belief.

A common belief is that in order to get into the buy-side one must do time in the sell-side (i.e. investment banking, equity research etc..). With the streamlining and industrialization of career paths it has become the conventional route for many who wish to become the principal of capital.

When you scour on LinkedIn and look at professionals in hedge funds, many come from an equity research or investment banking background. Seldom do they come from an accounting and consulting background, like moi.

This fact deters many from venturing into a career in investing and may actually be why people who ask me about the buy-side tend to be from non-finance backgrounds as well.

It's easy to just tell you "what" I did but I think the "how" and "why" is just as, if not more, important.

Let me tell you a story.

When I was an accountant, I specialized in investment banks as clients. I was a broker-dealer auditor. It just sounded cool and had the aura of money so I figured that was the right call. Long story short, I learned audit was not for me after my third "busy-season" so I decided to try my hand at something different.

One of my accounting mentors had been a trader at a bank pre-2008 and what she told me about her job really intrigued me. My accounting clients were all sales and traders as well and their side of the office definitely looked "greener" from the depth of the audit room.

See, up until this point, accounting was not a "passion". I didn't even know what the word "passion" was then. But what I knew was that I was obsessed with powerlifting. I had been training since high school and my entire life revolved around it. My obsession with my diet and health habits revolved around powerlifting. So, I decided to dissect powerlifting to figure out why I liked it so much. I loved the psychological element of the sport (i.e. you really need mental toughness to even think about putting 400lbs on your back), the independent nature (i.e. my other favourite sports had been wrestling and breakdancing) and the long-term discipline (i.e. you train all year to get maybe just 10lbs stronger and that's with a perfect and disciplined system).

I thought trading would be like powerlifting. Saw similarities there with it being a competitive sport and lot's of individual psychology at play.

So I left thinking I'd do proprietary trading (i.e. trading for profit with the bank's own capital). Little did I know, prop-trading was dead after 2008. I took my first course in quantitative finance once I returned to school. My professor had been a prop-trader and he made it clear there was no room for that anymore. He then said if you wanted to be a trader you had to be a quant. I then realized I was one of two accounting students in a sea of actuarial science students taking the course. If that wasn't enough of a hint, my abysmal final grade was enough to indicate I was not a quant. Quite the misalignment of want and reality.

I left accounting, to the utter dismay of my parents and friends, and the career I thought I wanted to try was now not a reality. I spoke to the professor after class and asked him what a non-quant who wanted to play in the markets should do? He said look at long-term investing.

So I typed "long-term investing" and the first dude that popped up was Warren Buffet. I had no idea who he was, seems crazy to think that now with my entire bookshelf being lined up with books on Buffet and Munger. But back then Warren was a nobody in my life.

I went deep into Buffet and it all clicked. Value investing just clicked with me and that was going to be what I did.

In the meantime, recruiting season was coming to a halt and management consulting became my next venture while I educated myself in investing.

Questioning the myth.

Did I need a finance background? What was the sell-side? What did they do? Did I have to do it to get into a hedge fund?

Once I got into the weeds of value investing it was apparent to me that many of the top investors did not start off in the sell-side. In fact, they came from all kinds of professional backgrounds like law, medicine, engineering and humanities. A large cohort with humanities majors like history, philosophy, and psychology in fact. So finance background? Not needed. Most finance courses in university didn't seem to be additive in investing anyways. If they were, then I'd expect the professors to be running successful funds on the side but alas many don't.

Then why were so many in the buy-side from the sell-side? Well, there is the obvious element of "leaving to your client". Accountants in the Big 4 firm most commonly exit to become controllers at firms they audited or their competitors. Consultants leave to join in-house strategy and operations teams at one of their clients. Equity research folks who constantly sell their research to hedge funds leave to join the hedge fund. Business is people to people. You'll hire people you know, like and trust. Constant exposure from the client side will foster a relationship of sorts.

In essence, all 3 career paths I listed above are what I call "platform" jobs. Just platforms for you to launch yourself into something you really want to do. From my experience, most don't enter the platform job to willfully stay there for the long term. Having been on two such "platform" jobs I was very wary of taking on another. Everyone in the sell-side was telling me I had to do it in order to get into the buy-side and that's why they were doing investment banking and equity research. No one wanted to stay there though. It was another platform job scenario like in audit. Everyone in audit just wanted to stay 3 years to get the letters and then "start doing what they wanted". That was one rodeo I had left for good reason.

An accountant, turned management consultant is not the "typical" investing background, according to "people". I personally disagreed, obviously. Learning the language of business to then use it to understand and solve business problems only seemed the logical thing to do. Hence, the 'gate-keeping' mentality of only finance majors or folks having had sell-side experience going onto the buy-side sounded like utter folly. 

Saying a finance major who has only stayed in finance will be a good investor is like saying finance professors should all be hedge fund managers. The last time a bunch of nobel price winning finance professors mad a hedge fund it blew up in spectacular fashion (LTCM). The nature of investing requires an intense intellectual curiosity, strong self-awareness for decision making, humility, temperament and a lot of various intangible factors. These are not "factors" that only people in sell-side roles get. Investing requires having an opinion that differs from the masses and frankly, joining the crowd to join investment banking like every business student does not seem like "straying from the crowd" but rather jumping off the cliff with all the lemmings. I mean accounting and consulting are no different and I'd say majority of people in these fields started with such a mindset. 

Was it the hard skills like "modeling"? Buffet and Pabrai often talk about how they use calculators when doing valuations because it shouldn't be that complicated. Every investor has a different approach but intensively quantitative modeling definitely was not a required skill, and a shop requiring it probably wasn't a good fit for me anyways. Though I should mention that the models I created in consulting were much more complex than the models my friends in investment banking built. Some actually told me they didn't touch the models but just inputted numbers into templates that were already made. Another myth debunked. 

The need to join the sell-side seemed to be a common display of psychology where people justify decisions they've made. It's a function of our pre-frontal cortex to find ways to rationalize decisions we make by slapping together facts that fit the opinions we have from the neo-cortex. So for someone who knew he didn't want to stay in the sell-side but did it with the hopes of getting into a hedge fund because that's what he saw, he has to justify that decision. People hate being wrong, and they hate admitting they are wrong more.

Doing my own research.

With the initial approach there were many elements of the "pre-determined" path that seemed fraught with untested assumptions. So I set about doing my own research. Thanks to the wonderful time we live in, information is abundant and right at our finger tips. Being a big proponent of value investing I had already digested a few hundred hours in video and audio content from interviews with the top buy-side managers. But there are always other sources like Quora or Medium where folks in the sell-side and buy-side will share their personal experiences. These all accounted for small data points to consider.

But most were not directly relate-able. I wanted to learn about the industry dynamic in Canada. Thankfully, I was in Toronto where arguably 80-90% of the finance industry is located. It was time to actually set about meeting the various industry professionals to ask them about their roles and their own career journeys. I previously wrote about the value of networking for informational purposes to test hypotheses and assumptions on various career fields and this experience encompassed the many principles I wrote in that essay.

I wanted to hear from the horses' mouth so I would also ask individuals who were in buy-side positions that came from a sell-side background and I asked them if they thought it was required and they said 'no'. In fact, many recommended I don't bother going to the sell-side to join the buy-side if I already knew that was something I wanted to do. Some careers have requirements like accountants needing a CA designation or doctors needing med school or lawyers needing law school but to be an investor requires no "professional degree". Investing is the concept of allocating capital, time and effort to compound wealth. No degree required. So it should NOT require a streamlined pathway to do it. It just seemed rudimentary. 

Through out a period of approx. 12 months I cold emailed about 70 different buy-side managers whose investment philosophy described themselves as bottom-up + fundamental + value-oriented stock pickers. Over that period I was able to meet and learn from about 25-30 separate individuals in the Canadian buy-side industry.

In addition to the key learnings I wrote about in the "networking essay" there were few specific things I learned and experienced during this foray for information.

Lessons: 

  • #1: Provide something of value.

    I previously wrote about the value of getting referrals to have warm intros to individuals to increase your chance of meeting them. This is because it layers on a level of trust. It provides a level of assurance that you aren't someone that will be wasting the other person's time. This might seem harsh but it's true. Everyone is busy and time is their most important resource. An hour invested in you is an hour taken away from another task.  So if the hedge fund manager is going to meet with you, she'd probably want to know that you aren't someone who will waste her time by asking questions that could be answered with a few books, podcasts and youtube videos.

    Ah, but you'll still have to start "cold" in the beginning. So how do you earn some trust then? It's about providing value to them. To potentially limit the "loss" of their time in meeting you. They are already going to be providing you value with the answers they provide to your question but what could they get out of it (other than maybe a heart-warming feeling of paying-it-forward)? When I reached out to buy-side managers I attached 1-2 stock reports. Usually one short one (3 pages) and one long one (15 pages). Given the role is looking at companies, analyzing them and investing in them it makes sense to demonstrate that you are already doing this on your own time. The stocks I pitched were ones that I personally invested in or ones I'd passed on after analysis and my reports showed that.

    As I mentioned before, I met numerous people over 12 months and that included catching up with the same people multiple times to update them on my progress. I would also pitch new stock reports to them as well. I mean, if you are serious about being an investor you probably wouldn't quit after writing just two reports. 

  • #2: People hire people. 

    The more buy-side folks I spoke to, the more apparent it was that many got into their positions the way I did. By reaching out to folks to learn about what they did and what made their fund unique. Most understood exactly what I was doing and had agreed to meet with me because they had kind people agree to meet with them when they were starting out. Just like that, the industry had a great culture of "paying it forward".

    To add to the generosity of the folks in the industry, most of my interviews transpired after the coffee. Sometimes I would get an interview invite during our coffee chat or after I had followed up. Given the industry doesn't have a "hiring season" or a major "need" for people, the hiring can be sporadic and when the opportunity arrives you just want to be ready for it and since you can't know when the opportunity will arrive just getting my name and intentions out there through these conversation paid massive dividends. 

  •  #3: Not enough people do it.

    This was also a very common feedback I got during my coffee meetings. Most were impressed with the reports I'd attached and all the legwork I had done with the books I read and the knowledge I had but many also commended on the number of buy-side individuals I had spoken with. This was the big "counter-intuitive" thing they didn't understand with people trying to get into the buy-side. Why do you bother applying to an investment shop where you haven't done the due diligence to learn about the people, the culture, and the investment process? 

Emergent to Focus.

After having spoken to a few dozen funds I developed an understanding of how each fund invested. Whether their investment philosophy aligned with their actions (i.e. are you actually a stock picker or index hugger), and whether the investment process they executed on was something I agreed with. All the coffees were part of the "information gathering" phase, the emergent strategy so to speak. It was about figuring out the environment and determining where I wanted to focus my efforts on. If I was going to invest my efforts of busting my ass to join a buy-side shop I wanted it to be one worthy of the continued investment of my time. Time being the most valuable resource, an investment of my own time into a firm is more valuable than any stock investment I'd make. As such, I wasn't going to just willy nilly blast resumes to any job position without having vetted the company. It was about adopting the mentality of whether I would deem the firm to be worthy of my time. I eventually narrowed my focus down to four funds. Each slightly different but each one that I felt would give me the best experience of value investing at an institutional setting so that I may test out the hypothesis of whether the work of being an institutional public equities investor was something akin to my "dream job". This also made it easier to cut out distractions too when focusing on the recruiting process. 

Patience and Persistence. 

Throughout the 12-18 months process of meeting with the various buy-side shops I had met between 25-30 buy-side managers. Of which I had 4 interviews, from there I had 2 offers. One of the offers came from a long 3 month interview process with 6+ rounds which ended in the offer being revoked on a claim that I asked about "5 year" time frames for my career instead of "forever". One of the interviews was an on-and-off 1 year process of cold emailing investors in the fund, getting an initial interview for them to vet me, me sending them new reports every 3 months or so, and getting an interview 6 months later when a spot had opened up. One interview process was a fast 1 month where I went through a 4 hour superday with 14 members of the fund, I'd been following this fund for 1 year until they had a spot opening.

Most people I speak with want some new job immediately... this month or in 3 months. Most never consider to think that seeking a job, regardless of it being a buy-side role where the seats are extremely limited, is a long-term organic process where they should carefully comb through the opportunities and assess how it fits with who they are. Sometimes things can happen quickly. My first interview happened within 2 months of my coffee meetings. But it was a full 16-18 months before I made my start in the buy-side. This isn't really that long of a time if you think about it. It was 1-2 years of full immersion of reading everything I could about value investing, and another 1.5 years until I made my way into the industry of my "dreams". It may be the result of my "dreams" being too small but it's really only about half the time people spend in university. So it's not long. I think it's rather an incorrect assumption and expectation that things are supposed to happen quickly. This actually deters many to quit early and generally that might be nature's way of naturally selecting off the weak. 

I very much do believe that if you can't bust your ass even for a year, take the time to actually speak to a few dozen people doing something you "think" you're passionate in, actually be doing what you want for your entire weekend and weekday nights then you my friend have some weak ass dreams and the fact of the matter is that you probably aren't meant to do this and you should find something you can are willing to "eat shit through" whilst doing. Because, every role will require you to "eat shit", whether it's the process of getting it or when you are actually doing it but your love for it will let you get passed it. I whole heartedly believe persistence and patience is innate in people and it will be applicable in areas they are truly in love with. Anything takes time to be good. I'm not one to shoot 1000 free throws everyday but I like squatting and deadlifting so I've been doing that for close to 10 years. Like such, I'm sure you have things you love doing, despite the hard times and difficulty. So examine those and ask yourself "why?".

 

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