The China Investment Corporation’s Vice Chairman leveled a rather interesting critique recently against... his fund’s own employees. Here’s a blurb from the CFA Institute:
“The vice chairman of CIC... went on to argue that too many of the smartest engineers have been pulled into finance over the past 20 to 30 years. That has created a “self-fulfilling prophecy” in which the best minds engineer financial products instead of industrial products. Gao also lamented the lack of real-world experience among the investment practitioners on his team. Although CIC uses financial models, he does not trust them, preferring instead to evaluate investment opportunities firsthand. Gao said he was once a railway construction worker and even worked in an artillery factory, so he knows his way around an assembly line. He said that he has personally visited hundreds of factories and has declined multibillion-dollar investments based on unsatisfactory site visits. However, most of his staff were trained in the United States and Europe, he said, and few have practical training in “actual work,” as he put it, meaning in factories or companies that make physical products.
I too have been frustrated by this phenomenon. In fact, I’d go so far as to say that way too much intellectual horsepower goes into gearing and engineering a few basis points here and there (often over short-term time horizons) rather than focusing on adding value over a long-term time horizon. I personally like thinking about finance as more than a zero sum game, but many are focused on strategies that take the opposite view.
As I argued in a recent paper with Jagdeep Bachher, long-term investors should be focused on creating lasting value (rather than just taxing market inefficiencies). They should be building businesses, buildings, bridges and even planting beans. They should look for ways to remove unnecessary abstractions in order to better evaluate the long-term growth prospects for a given asset. And , as such, these long-term investors shouldn’t be trying to hire employees from Wall Street or The City... they should be looking for people with a slightly different make-up that can drive sustainable growth for decades to come.
By the way, this is the reason why the research center I run at Stanford University is housed within the Engineering school; we want everything we do in finance and investing (and we are doing a lot) to be grounded in the needs and demands of the real economy. So I think I understand Gao’s point here better than most. There is something truly remarkable about walking the halls with the world’s best engineers and computer scientists and have them describe the challenges of building actual stuff (rather than talking about their new hedge fund or algorithmic trading strategies)...
