We interviewed the investment team of the MIT Investment Management Company, based in Cambridge, Massachusetts for The Manual of Ideas, the flagship publication of MOI Global, in 2014.
We had the privilege of getting a glimpse into the decision-making process at one of the world’s finest allocators of capital, the MITIMCo. In this exclusive Q&A, President Seth Alexander and global investment team members Joel Cohen and Nate Chesley share their process for identifying and partnering with exceptional investment managers. The team also provides invaluable lessons to emerging managers who aspire to become the superinvestors of tomorrow.
In their mission to deliver outstanding long-term investment returns for MIT, Seth, Joel, Nate and the rest of the MITIMCo team seek to cultivate an ecosystem of enduring partnerships with no investment manager being “too small, too young, or too ‘non-institutional’.”
The MITIMCo team’s perspective and advice are timeless and truly invaluable for emerging managers looking to build a great investment firm. Enjoy!
MOI Global: How did you get interested in investing?
“My early professional experience at an investment consultancy was influential in my desire to invest for the benefit of an extraordinary institution like MIT, where the capital we manage is reinvested in world class scholarship, research, and global problem-solving” —Nate Chesley
Nate Chesley: I didn’t grow up with a lot of exposure to the stock market but was always inclined to view the world through an economic lens. I studied finance and economics in college where I came to appreciate the role of the capital markets as a sort of circulatory system for the global economy. My early professional experience at an investment consultancy was influential in my desire to invest for the benefit of an extraordinary institution like MIT, where the capital we manage is reinvested in world-class scholarship, research, and global problem-solving.
Seth Alexander: I took a course on endowment management taught by David Swensen and later went to work for him. He is both a wonderful investor and a wonderful teacher so it was a very fortunate experience. I think I was initially drawn in by the quality of the people at the Yale office and later by the breadth of the business.
Joel Cohen: Similarly, my interest in MITIMCo came first and my passion for investing came after I started working here. In my job search during my senior year of college, no one else came close to what MITIMCo could offer in combining interesting and challenging work, a real commitment to investing in every member of its staff no matter how young, and an incredible mission.
Within a few months after I joined MIT as a 22 year old, I realized that investing was actually an even better fit for my interests and personality than I thought. I’ve always been intellectually curious and enjoyed reading widely – I was a philosophy major in college in addition to econ, after all. So when we read Hagstrom’s Investing: The Last Liberal Art, it clicked for me why I found it fascinating: investing is an ongoing quest to integrate mental models from a variety of disciplines into a framework for understanding the world and making decisions. I feel very lucky to have joined an organization that thinks about investing that way.
MOI: Which people and/or experiences have shaped your investment thinking?
Seth Alexander: It is honestly a little hard to pinpoint the exact source of what has influenced our thinking most. We gather thoughts and ideas from lots of different places and try to amalgamate them into what makes sense for us. Probably our best source of investment thinking comes from conversations with managers in our portfolio. There are lots of challenges they face – how to build an organization, how to size positions, how to structure a typical day, when to hold cash, and so on – that are analogous to challenges we face and so we have been influenced a lot through those discussions.
For example, we restructured the organization a few years ago to make everyone generalists based on what had worked well with some of our managers. We also read a great deal. We have an internal book club that covers science and history and other subjects to help us generate ideas from outside the investment world. We are very happy to borrow ideas so we do that liberally and work to fit them into our frameworks.
MOI: How have you gone about building the organization and team?
Seth Alexander: We have tried to find the best athletes with a passion for investing, not necessarily the most experienced investors. We also look for people who get excited about the ways MIT contributes to cancer research and alternative energy research and other efforts. We started early on with a vague organizational chart and eventually eliminated it altogether to make it clear we wanted people with all levels of experience to come in and contribute as investors and partners.
We do not try and hire someone every year or anything like that. Instead, we hire opportunistically. If two great people came along in the same week who would both be a great fit, we would hire them. We are always looking to hear from passionate investors about working here and really encourage people to reach out to us.
MOI: What is similar/different in the skillset required to successfully invest in securities versus investing in managers?
“Our approach to underwriting investment managers is quite similar to the way a stock-picker might analyze a company’s management…” —Nate Chesley
Nate Chesley: We avoid drawing too bright a line between our approach and direct investing because there are more similarities than differences. We have a culture and mindset of thinking like owners and focusing on the micro that is motivated by Graham’s sentiment that “investing is most intelligent when it is most businesslike.” That leads us to focus a lot of our time understanding how our capital is invested bottom-up in the specific companies, properties, and other securities we own through our managers.
One similarity between the two skillsets is the emphasis on evaluating people. Our approach to underwriting investment managers is quite similar to the way a stock-picker might analyze a company’s management: an intense focus on integrity, a track record of outstanding judgment, and a clear alignment of interests. Also, for every investment decision we make we evaluate the margin of safety, the range of potential outcomes, and the associated probabilities – just as one would do when investing directly in a security.
One difference might be our generalist approach. Each member of our investment team has the flexibility to cover the entire waterfront, whereas many investors are intensely focused on a very specific niche, such as biotechnology stocks or early stage consumer technology companies – or at least one particular asset class or geography.
The Process of Identifying and Partnering with an Investment Manager
MOI: You have stated that you “aim to establish investment management relationships that last decades.” What are the key implications of such a mindset on how you go about doing business and what managers you look for?
Joel Cohen: MIT, which hopefully will continue to be a leader in education and research hundreds of years from now, is one of few market participants for whom even decades are a comparatively short time period. We think this creates an enduring competitive advantage in a market where three years passes for long term. Thinking about partnering with managers for decades naturally leads us to ask a lot of questions to understand the trajectory they are on and what they are trying to accomplish. For example – how do you define success? How are you building an organization around that goal? Which investors do you hope to emulate? What are you doing to become an even better investor 10 years from now than you are today?
Another implication of this multi-decade mindset is we have a willingness to engage with managers earlier in their careers. These managers can have decades of compounding ahead of them. Will the 25 year old manager we just hired still be compounding our capital half a century from now? We are excited that it is even a possibility!
MOI: How do you categorize investment managers?
“The more we thought about it, the more we realized that perhaps exceptional investors by definition could not be easily classified.” —Seth Alexander
Seth Alexander: The biggest way we categorize managers is whether or not they fit into our comfort zone. For example, in looking at public markets investors we have defined our comfort zone as long-term oriented, fundamentals-based, value investors that pursue strategies we can understand and underwrite. This narrows the field quite a bit, as macro, quant, momentum/trading, and benchmark-driven strategies tend to fall out.
Beyond that, we actually try pretty hard not to categorize managers. We tried for a while but every time we came up with a classification scheme, we would come across an interesting manager that did not fit. The more we thought about it, the more we realized that perhaps exceptional investors by definition could not be easily classified. Once we got comfortable without having classifications and just focused on finding great investors, we were much happier.
MOI: What is your process for evaluating managers to find the ideal manager? Does that process differ depending on the type of manager, and if so, how?
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