Why Wall Street Should Study Belichick
Bill Belichick… Legendary hedge fund investor?
Ray Dalio is one of the most legendary hedge fund investors around. When it comes to “macro” style investment analysis, he’s considered the king. All hedge funds nowadays employ quantitative investment methods, but if there is a hedge fund that emphasizes critical thinking and qualitative analysis, it’s Bridgewater. Thankfully for us readers, Ray has dedicated his recent years to writing books about his investment and life principles that give the average person insight into what’s lead him to where he is. As a dork for finance, I couldn’t wait to read “Principles.” I was excited to see both the non-investment and investment industry-related life experiences that have influenced this legend. In all honesty, I was ready to see what made this guy so special. I’ve always thought, “if he could do it, I could do it” when it comes to people like him. So when reading principles, I wasn’t looking for a magic potion to become the greatest investor in the world nor was I looking to emulate his life story in hopes to become him; an unrealistic hope, to say the least. That kind of desire to emulate is a natural human instinct and probably why his book sold so well. In fact, one lesson I took away from his book was that your ability to know yourself, think objectively without indulging in tribal instincts and herd thinking will make you a clear-headed investor and ultimately live a purposeful life. He stresses the process of constantly checking yourself to see if your decisions align with your own principles before ever going through with one so that there is no room for misguided actions. I think we can all agree that this is solid advice.
But I am left unconvinced that Ray practices this advice to the fullest in his own firm. If he advises us to find our own principles and respect them enough to really live by them, then why doesn’t he respect his Bridgewater employee’s unique principles enough to allow them to constantly adapt Bridgewater’s rigid system of weeding out people and ideas? Even though Ray openly encourages criticism of his ideas and advertises the fact that, just like anyone else, he can be ousted from his own organization, The Bridgewater system basically says, “it’s this system of objective decision making or the highway.” But if Bridgewater were to really run by Ray’s principles of constantly checking itself, then it would welcome not only different ideas but different approaches to finding ideas. It would not just find good ideas, but employ dynamic systems that accommodate the constantly changing personnel, with not only unique ideas but unique approaches to finding good ideas — dynamic systems.
In recent years after “Principles” was published, Bridgewater’s financial returns have been lackluster at best. Is it because he’s been absent while writing his books? Possibly. But one of the main points in “Principles” is that in order to run a successful organization, the leader must create a human machine that runs with no micromanagement. Ray claims this is why Bridgewater has historically been so successful. He claims he’s created the perfect human machine that runs on its own by following certain rules without him. So why have its returns lagged behind competing hedge funds like the Medallion Fund and Point72? Is this human machine falling apart now? What’s wrong with it?
I argue that it’s not just a problem with the human-machine, but the whole system of ideas behind the notion of “qualitative vs. quantitative” financial assessment. Basically, thinking that “macro” qualitative strategies are in dichotomy with “micro” quantitative strategies is a reductive and surface-level way to view investment strategy. Maybe that’s too much to get into now, but the point I’ll make in this article is that Ray contradicts himself when he tries to operate a qualitative “macro” oriented investment business like a human machine trying to shove an ideological aesthetic of a static machine onto something that is inherently fluid.
Bare with me for this next comparison. Ray Dalio wants to run Bridgewater like a brand new Tesla Model S, where his employees are the car parts, each serving a unique and crucial function. This is a wonderful idea and is a goal that’s easily visible. But what if today, Ray has all his Model S parts, but tomorrow, when new parts need to be replaced, he acquires state-of-the-art Ferrari parts. Should he put those parts into his Model S? No! He should build a whole new car around his new and constantly changing parts. In other words, when new people, new ideas, and new environments enter his firm, it’s highly inefficient to mold them to his performative meritocracy or cut them. Instead, his whole system should adapt to the talent he has in front of him. Otherwise, he’s shutting outsmart people that just don’t perform merit the way his system rewards it.
In the intro of “Principles”, he says the reader can skip his life story and jump straight into his principles if they want because it’s not entirely important. I was shocked by this. When I was in that cute bookstore/coffee shop in Westerly Rhode Island I wanted Ray to walk in so I could say; “Ray, don’t you realize that the context of your principles are necessary to understanding you as an individual and thus the principles you run your life and company by?” It’s obvious that Ray doesn’t see his own context and the “metadata” of his own words in that book as valuable to his principles. And it’s why his human machine breaks.
He would agree that adaptability is crucial when it comes to fighting dogma behind investment ideas. But when it comes to running his company, if you don’t subscribe to the dogma of his objective process of reasoning and perform your opinions in a way that appeases his idea of a dynamic human machine, then you’re out.
Now hear me out on this one: One of the most adaptable organization leaders in the world, Bill Belichick, Patriots head coach and 5 time Super Bowl Champion, would say Ray should instead have a dynamic idea of a dynamic machine where the formula to getting the best ideas isn’t a static one. That is to say that his system of principles should be adaptable themselves, accommodating for each smart person with not only smart ideas but a wholly unique approach to finding good ideas that his static system of legitimacy won’t always pick up on.
Now I guess you’ll say “where’s your evidence?” And usually, it’s hard to gather evidence about these highly secretive hedge funds… But if you have an appreciation for anecdotal data then you’ll appreciate what I’ll say next. It just so happens a friend of a friend of mine (who graduated from an Ivy League college and was captain of its debate team, winning national competitions etc.) works at Bridgewater and has been there for an abnormally long time given how high its turnover rate is. According to my friend, in order for his friend to stay in this machine, he doesn’t necessarily have to have the best ideas, he just has to defend them quickly and effectively. Basically, if you have basic economic know-how and can argue like Ben Shapiro, you’ll have a portfolio manager job at Bridgewater. But having the performativity of objectivity be so crucial is bad for Bridgewater!
This is why Belichick would kill it if he ran Bridgewater.
Now I know you’re asking “what does football even have to do with investing?” Comparing an NFL head coach and a legendary hedge fund manager might seem like comparing apples to oranges (and you might be right. But all I ask is that you chew on this food for thought) However, when it comes to organization management, there are certain un-ignorable practices and strategies that are employed by the greats.
Yesterday (July 14th, 2020) on The Herd, Colin Cowherd spoke about how Cam Newton might not fit into the Patriots system because of his personality and the way the Patriot's culture and offense worked so well with Tom Brady. But podcast guest and former running back Brian Westbrook poignantly responded saying that Belichick is a master of building systems and cultures around his key players and that it wouldn’t be the first time a big personality player succeeds in the Patriot system. The “Patriot Way” worked for Brady because it was built around Brady as the quarterback. Belichick and offensive coordinator Josh McDaniels will have an absolute blast building an entirely new system around a much more versatile QB in Cam Newton. His team may even catch opponents off guard and win some games they shouldn’t win on paper because of how different the offense will look. I remember watching Jacoby Brissett in 2016 and thinking; “wow, this does not look like the Patriots at all” yet they trounced the Texans, slightly souring their 9–7 season. The Ringer NFL Show’s Bill Simmons also mentioned something similar earlier this summer on The Bill Simmons Podcast on June 29th 2020, saying — and I’m paraphrasing — that this will be the season that Belichick not only shows how good of a coach he is, but shows how important system flexibility is in being a great coach. He may even solidify his legacy and set the precedent for system adaptability in the years to come… That is if the 2020 NFL season even happens (R.I.P spring 2020).
Ultimately, Belichick is a master at building systems around his key players’ strengths. he does this in part by acquiring supporting players that are under the radar as all-around good players in their positions but have unique strengths that complement the key players that the system is built around. He does not force all his players to fit a static system. As Bill Simmons says, we’re going to see an entirely new Patriots team because of this entirely new quarterback. So that begs the question; why haven’t we seen a changing Bridgewater with changing personnel given the high talent turnover?
To be fair, it’s not quite Ray’s fault. Turning the qualitative process into an objective machine is something that the investment community has strived to do since the 1920s when investing looked more like betting than anything we have today. And to be fair, the NFL and American sports, in general, have just begun embracing statistics and quantitative methods and winning championships by them (See the 2010’s Golden State if you’re not convinced. Or just watch Moneyball for that matter). But the tradeoff isn’t just numbered versus guts. And the broader NFL and Wall Street cultures just don’t see that.
Many smart people would say that qualitative investing has been defeated by quantitative investment especially when it comes to the amount of money a hedge fund plays with and the environment a hedge fund operates in. But this is just not the case for the entire investment field. In fact, as a poor young college grad, I run my own market-beating Robinhood account using my own unique qualitative strategies. The point is, there exists many, if not infinite, combinations of market-beating qualitative and quantitative techniques but the investment world can’t help but think of it as “qualitative vs. quantitative” and “subjective vs. objective”. For Ray to even come close to running a legitimate macro investment strategy that employs qualitative methods, he’s told himself that he needs to turn his whole human capital operation into a quantitative machine that abides by specific rules that perform a notion of objectivity.
In the NFL, the transition from heart, guts, and balls to brains, stats, and analysis is still happening. Admittedly, Patriots rival Sean McVay embodies the forefront of that transition by dogmatically abiding by his stats-derived decisions. But if you remember the 2019 Superbowl, you’ll remember how Belichick trounced and embarrassed McVay’s Rams offense in the Super Bowl holding them to a whopping 3 points. In doing so, Belichick demonstrated that he is far ahead of his time, utilizing the most helpful aspects of qualitative decision-making and quantitative information gathering in a dynamic way that best suits each situation. Belichick won because of his quantitative ability to see what and who works for his system in a detailed way and his qualitative ability to play to his system’s strengths and his opponent's weaknesses in innovative ways and throw away old interpretations of information for new ones. Sean Mcvay, on the other hand, was grasping to his way of doing things no matter how thoroughly Belichick read his system and his mediocre quarterback, Jared Goff, like a book. The same way those old scouts dogmatically stuck to their guts in Moneyball, Sean stuck to his stats-driven playbook. Sean McVay is the NFL’s Ray Dalio, but nobody leads an adaptive organization, whether it’s in finance or anywhere else, quite like Bill Belichick.