WHAT TO DO WHEN YOU BLOW YOUR PM UP: An age old rite of passage!!! You make the move from the sell-side, secure that plum buy-side seat, breathing that refined buy-side air. The first 6 months on the buy-side can (and should) be a fun, exhilarating adventure. So much to learn,
So many people to meet, so many dreams of alpha generation. You’re ramping well and PM is beginning to trust you. It feels amazing! You find yourself in a situation where you start to have direct idea coverage. You pitch an idea, and it gets in the book, in SIZE. You feel amazing
You chat with your peers about the “fight to get ideas in the book” and you feel silently better than everyone that your ramp to idea generator was so fast and easy. Then your idea blows up. Epically. A long down 25%, leaving a big P&L hole. It’s a fiasco. What do you do?
OWN IT. Given the context here (i.e. wanting SO BADLY for this idea to work - to support your EGO), it is HIGHLY LIKELY that your first response will be to reflexively defend this idea. Flailing around, pounding the table “the market doesn’t get it! This is an overreaction!.
“…we have to double down!!!”. While doubling down might indeed be the right answer, the ego can blind you to the right path here. That decision comes later. The first step is to own your mistake, and yes i said YOUR MISTAKE. CEO walked you off a cliff - YOUR MISTAKE. Buddy at a
..another fund said it was his best idea - YOUR MISTAKE. Sell-side upgraded stock on bull thesis - YOUR MISTAKE. Alt data gave a bad read on the quarter - YOUR MISTAKE. Your job as a stock-picker is to weigh all of these variables and make the right call in light of this noise
Ultimately, if you sign off on an idea, you own it. So own it. Idea blows up? Telling your PM “I’m sorry, i screwed up here, can we figure out how to fix this?” can go a long way towards building confidence & connection. Don’t be the reflexive table pounder!
MANAGE YOUR EMOTIONAL STATE. I blew my team up early in my career (right after i moved to a bigger, more important team) and it felt AWFUL. Your mind spins incessantly - “will i get fired? Will they ever trust me again”. It can be easy to spiral into a mental state that
Isn’t very productive. You are going to have to be mentally and emotionally sharp to see clearly in this situation. For me, booze used to be my first escape (4 glasses of Macallan and the worries are gone…) but i started to see the after-effects of booze actually exacerbated
My negative emotional state. I forced myself to learn new tools during some really stressful markets (journaling, meditation, yoga, breathwork) that became indispensable to me for handling market stress. For you it could be pickup basketball or a long run in Central Park.
Whatever gives you that feeling of mental calm and clarity, double down on that during this time. You won’t want to make a decision with that chatter present. DISPASSIONATELY DIAGNOSE THE ISSUE. Why is the stock off 25%? With a clear head, start to re-underwrite the stock.
Did the stock start from an extended valuation level and now we are just back to median levels? Was the stock over-earning and the profitability reversion just starting? Or did a 10% EBIT non-core segment blow up, and -25% on a 10% profit hit that can be shut or sold? Good short
Sellers try to “shoot shorts in the back” as they have learned the first miss is often not the last miss, and once a story / momentum breaks, you can put your proverbial foot on a stock’s neck for the highest sharpe part of the alpha curve. Be open minded that might be happening
Here. Generally, situations where the 3 Key Drivers of the business are showing decelerating business momentum lead to extended miss & lower cycles and P/E ratios that can undershoot to the downside. Be careful doubling down into one of these situations.
DILIGENTLY PAINT THE RISK CASE FROM HERE. Using your diagnosis tools, work hard to characterize the downside from here. Is this a cheap stock that just went to all-time low P/Es with stable FCF? Or is this $PTON after the first miss? Study history of when the stock went off
The rails, study historical & peer valuation, and try to paint a picture, from this price, how bad things could get from here. A young analyst tends to anchor on recent stock prices, and -25% from here analyst liked it a week ago seems like a bargain! But perhaps something
Really did change in the story, and with clearer eyes the story and business momentum just broke (often -25% moves tell a story themselves). Have a flexible enough mind to consider that might be happening, and lay out the facts and numbers in a probabilistic fashion
GIVE PM THE MENU, LET PM CHOOSE THE PLAYBOOK. Put yourself in PMs shoes. He gave you responsibility too early, you blew PM up, PM may personally feel at risk of losing capital. These situations can be very emotionally fraught. Be careful not to exacerbate this relationship
By being difficult. PMs don’t want to hurt analyst feelings, but have to do what’s right for the portfolio. Have self-awareness that PM has seen many more of these situations from you and very likely has better insights on how PM wants to proceed. You have to be able to accept PM
Playbook in this situation. Maybe PM wants to punt the idea and take the ticker off Bloomberg terminal (i.e the “you’re dead to me method”). You must accept that. An immediate punt and revisit in 3 months (i.e. the “timeout method”). These methods might seem unfair and arbitrary
To you, but I’ve learned as a PM they really can work. Maybe even the “flip directions method” and PM is now shorting your long idea that you are pounding the table on to double down. How’s that for a hit to the ego?? Especially early in your career, you can’t wage a holy war
In these situations. Maybe IT IS a short, now. If you see that, support PM in the flip, make $ back, you will earn immense credibility. If you fight PM on PM’s chosen method and it becomes chippy, you can kill your relationship w PM before it develops. Maybe it is a double down
Going w the PM flow (early in career), trying to learn from PM blow-up playbook, will not only teach you how to handle these situations, but build you immense credibility to take more of a driver’s seat in situations in the future. As one of the wisest PMs I’ve worked with told
Me after an epic blow up “you are going to get it back with different tickers”. He was right, and I did. HAVE PERSPECTIVE. Blows ups happen. It’s part of the business. There are ways to mitigate blows ups (thread for another day). But blowing up your PM truly is a rite of
Passage. it builds scar tissue and develops mettle (that you will need in the future). So use this extremely painful experience as an opportunity to learn, grow and deepen both the relationship with your PM and your faith in your own abilities. That’s what great analysts do.